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What is the actual problem?

A:

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.


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