- I thought Congress just fixed Corporate Tax Reform?
- What is the actual problem?
- What is Destination-based? Is this similar to the unpopular Cash Flow Tax proposed in 2017?
- Could you provide an example of this?
- How is this even possible?
- What is the better way to implement an America First Tax Strategy?
- What is a Destination-based tax system?
- What actually is Sales Factor Apportionment?
- How would you actually calculate the Sales Factor Apportionment of a company?
- And how does this benefit American Companies
Congress did pass a comprehensive tax bill in December 2017. To their credit, Congress recognized the tax discrimination that our American domestic corporations are facing. Domestic corporations pay the full corporate tax burden while multinational and foreign companies can shift profits to tax havens to pay less. The Tax Cut and Jobs Act modestly reduced the problem but did not eliminate it. Companies still have significant incentives to move production or profits offshore. It also added complexity instead of simplifying the system.
The United States corporate tax system doesn’t treat businesses equally. The tax code does not deal well with international tax loopholes and has never fully addressed the issue of profit shifting.
Profit shifting is when a multinational corporation uses its subsidiaries in low tax or no tax countries to charge more for the product or services they provide. Even though they are supposed to operate as if they were a separate company for tax purposes, in reality, they are judged on a case by case basis. There is no effective standard. This lack of a standard gives foreign and American multinational corporations a massive advantage over their domestic competition.
Because corporations can usually make a reasonable argument why the subsidiary in the low tax jurisdiction can charge so much more to the U.S. based part of the corporation, most cases are considered to be reasonable. The new law attempted to address the issue but made a tactical error. To determine if a corporation is engaging in this practice unfairly, they designed an arbitrary calculation. By including overseas production as the denominator in the calculation to determine if additional tax is owed, it incentivized tax avoidance by moving production overseas.
No. Cash Flow Tax is a type of Destination-Based Taxation, but there are different types, such as Sales Factor Apportionment.
Destination-Based Taxation is tax associated with the final location of the product or service. This stands in contrast to Origin-based taxation which is defined with the source of the creation: Capital, Labor, Headquarters. While there is a philosophical debate as to where the value is created, as a practical matter, All origin-based taxation is subject to easy to move techniques to avoid tax. "Sales" stands in contrast as the customer is difficult to move. But taxing Sales directly creates other distortions and can harm retailers. Taxing profits based on sales is a Destination-Based Taxation model with the least distortions and the most simplicity.
If the local coffee shop and a multinational brand coffee make the same dollar of pre-tax profit off the coffee you bought yesterday but pay two different tax rates, the one with the lower rate will have the advantage. And the Multinational Corporation has the advantage by moving money around using its subsidiaries overseas. The American Domestic is usually paying an additional 50% in tax rate than the multinational corporation.
Many Multinational Enterprises (MNEs) can get their effective tax rate lower than domestic competitors. MNEs use their subsidiaries in tax haven countries as a means to move their money around.
If the corporation’s ships used to transport bananas from Brazil to the United States are registered as based in the Bahamas subsidiary, the Bahamas subsidiary can charge a little more per banana. They can’t charge too much as they are subject to some rules. But they can charge more from multiple subsidiaries. One subsidiary for accounting in Luxembourg, another for logistics in Jersey, one subsidiary in Ireland holds the official branding. Anything that can officially be based in overseas offices can charge a bit more per banana too. By the time this is all done, officially the profit per banana in the U.S. could be 1 cent for the MNE. Meanwhile, the Domestic company has to report the 10 cents of actual profit in The U.S. The Domestic company has no subsidiaries where they can move their profits.
Destination-based corporate taxation relies on a practical business reality that value is practically established when a buyer is willing to pay for the product. This viewpoint doesn’t discount the academic economic theories about where value is produced. Rather it recognizes that taxing based on where the buyer/user actually resides is far less open to manipulation.
Coupling a Destination-based corporate tax with a Sales Factor Apportionment protects American domestic companies.
Destination-based corporate taxation relies on a practical business reality that value is practically established when a buyer is willing to pay for the product. This viewpoint doesn’t discount the academic economic theories about where value is produced. Rather it recognizes that taxing based on where the buyer/user actually resides is far less open to manipulation. Coupling a Destination-based corporate tax with a Sales Factor Apportionment protects American domestic companies.
Sales Factor Apportionment is a corporate tax that only taxes corporate profit. It determines what profit is taxable in the U.S. by determining how much of the profit can be attributed to the U.S. Instead of relying on labor or capital which can be moved easily, the profit is compared to the sales which are hard to move. Any attempts to move sales is on paper and can be easily quashed.
To give up being taxed in the U.S., any corporation has to give up market share in the U.S. So the total profit of a corporation will be multiplied by the fraction of U.S. Sales as a part of total sales. This result is the corporate profit made in the U.S.
The basic components of sales of a company establish the percentage to be apportioned as taxable. The domestic sales of a company as a percentage of the total sales of the company establish that exact percentage. The exact percentage is then applied to total Profits of the company. The result is the amount of taxable income available to the U.S.
For example, foreign Pharmaceuticals Corporation (FPC) sells $10 billion of its products to customers around the world. $6 billion of those sales (60% of total sales) are made to U.S. customers. FPC’s worldwide profit is $1 billion, therefore, $600 million of that profit would be taxed as U.S. profits.
(a) no incentive to move profits or production offshore;
(b) eliminates domestic company discrimination;
(c) taxes foreign companies for access to US consumer market;
(d) incentivizes exports by not taxing profits from sale of US products that are exported.