Editor's Note: David Morse is the tax policy director at the Coalition for a Prosperous America Education Fund.
Right now, Washington is preoccupied with efforts to support struggling U.S. businesses during the COVID-19 pandemic. Surprisingly, some companies that use tax havens to avoid paying U.S. taxes are trying to get their share of this relief aid from the U.S. government. America’s taxpayers would likely oppose the idea of giving bailouts to tax avoiders. They’d say that a company choosing to set up a tax haven in Bermuda should look to their tax domicile for a bailout, not the U.S. government.
[David Morse | April 6, 2020 | The Medium]
Taxpayers expect that COVID relief money will go directly to U.S. companies and their workers. But there’s a logistical challenge. Many of the largest corporations operating in the U.S. — including brands that Americans use in their daily life — have long avoided U.S. tax obligations by incorporating in overseas tax havens.
Until late February, this problem of corporate tax avoidance — and the tax havens that enable such clever accounting — was often ignored. But recent federal assistance in the wake of the coronavirus requires that a company receiving bailout funds be “created or organized” in the United States — or under the laws of the United States. And a company qualifying for relief funds also needs to have “significant operations” in the U.S., with “a majority of its employees” based in the United States as well. Unfortunately, the vagueness of this wording now appears too lenient.
Some in Washington are concerned that bailout funds are ending up benefiting the same corporations that have successfully avoided U.S. taxes. Shrewdly, Denmark, Poland, and France have recently taken steps to ensure that government rescue funds are limited to businesses that do not use offshore tax havens. But these EU nations are still limited in applying such restrictions because they must allow tax havens that fall within the EU itself.
For the United States, the issue is more complicated. U.S. tax law has long assessed a company’s tax liability by its “location of incorporation.” Doing so inherently creates tax loopholes — even though various restrictions have been attempted. And so, even as Washington perennially runs annual budget deficits, it has yet to adopt a system of taxation that successfully targets the vast profits that some corporations — including vacation cruise lines, for example — continually earn from their U.S. sales.
Congress is now concerned that its recent bailout might end up helping some of the very companies that avoid U.S. taxes. Lawmakers want to ensure that the next package of coronavirus legislation does not similarly benefit tax avoiders.
If Congress is truly concerned about corporate tax avoidance and wants to establish a more equitable system of corporate taxation, it should consider shifting to an approach known as “Sales Factor Apportionment” (SFA). Under an SFA system, both foreign and American multinationals would pay taxes on profits earned from their U.S. sales. Thus, whether a company was incorporated in Baltimore or Bermuda would no longer have any bearing on its tax obligations. The company would simply pay taxes based on its share of profits earned in America’s lucrative consumer market.
Until Washington takes wider action to address tax loopholes, companies that exploit the U.S. market will likely benefit from crisis assistance. But that’s unfair for domestic American companies that keep playing by the rules — and carrying a full tax load. It shouldn’t take a pandemic to compel Washington to finally target companies that use clever accounting to evade U.S. tax obligations.
Read the original article here.