Today, 90% of all US exporting and importing is done by smalland medium sized companies. If structured properly, if profits arenot repatriated back to the US, a US entity does not have to pay UStaxes on those foreign profits.
Research Questions:
What are the tax rules of the repatriation and IRC § 952 subpart Fincome laws that avoid paying tax in the US? How do the IRC § 482transfer tax rules work and what should they know about them?
Discussion Questions:
Do you think it's fair that companies not pay tax on foreignprofits? Also, read the attached article and provide an opinion ifUS corporations indeed are paying to much tax.
U.S. companies may not be fleeing due to high tax rate, Reutersanalysis shows By Kevin Drawbaugh, Amy Stevens and Martin HowellFebruary 10, 2015 WASHINGTON (Reuters) - When a series of big U.S.companies last year moved to reincorporate abroad in inversiondeals, some Republican lawmakers and tax policy critics blamed thehigh U.S. corporate tax rate. Lowering it, they said, would keepcompanies from fleeing the country. But a Reuters analysis of thetaxes being paid by the six largest companies known to be doinginversions in late 2014 and early 2015 showed that, even before thedeals, all were paying below the statutory U.S. federal corporaterate of 35 percent. Most were well below it. The average effectivetax rate for the six companies was 20.3 percent for 2011- 2013,Reuters found, using an estimation method reviewed by tax expertsthat was based on public data for U.S. profits and U.S. taxes. TheReuters analysis suggests that the surge in inversion transactionsmay not have had much to do with the statutory corporate incometax. Moreover, it shows Washington's current debate over businesstax reform may be too focused on the statutory rate, neglectingeffective rates and the incentives that companies have to shiftprofits abroad. The six companies analyzed were Medtronic Inc,Applied Materials Inc, Steris Corp, Mylan Inc, C&J EnergyServices Inc and Burger King, which has been renamed RestaurantBrands International Inc. All six have recently completed or are inthe midst of completing inversion-type deals, despite a TreasuryDepartment crackdown in September that slowed inversiondeal-making. Inversions have been around for three decades, butthey became more common in recent years. Guided by tax lawyers andaccountants, companies have done more than 50 such deals since the1980s; about half of them just since 2008. The deals typicallyinvolve a U.S. company buying a smaller foreign rival, then takingon its nationality for tax purposes, while many core operationsremain in the United States. The six companies studied havethemselves disclosed 2011-2013 effective tax rates averaging 27.8percent, or 7.5 percentage points higher than the Reuterscalculation. The discrepancy with the Reuters figure is likelybecause the companies' figures include not just U.S. federal taxes,but all taxes, including state, local and foreign. In a project forReuters, the Institute on Taxation and Economic Policy (ITEP), atax policy think tank in Washington, looked at the six companies'data somewhat differently, stripping out certain accountingadjustments, and found an average effective tax rate of 22.2percent over the period. Tax inversion deals are mainly driven byefforts to shift profits out of the U.S. and to access overseasearnings at little or no cost in U.S. tax, tax specialists said."The issue is much broader than the U.S. corporate tax rate beinghigh," said Steve Rosenthal, a senior fellow at the Urban-BrookingsTax Policy Center, a centrist think tank. To be sure, some othertax experts and activists say the statutory rate is the key, notonly to inversions, but to broad U.S. business competitivenessaround the world. "You fix the rates, you fix it all," said GroverNorquist, a Republican activist and president of Americans for TaxReform, which advocates for lower taxes and smaller government.(For related graphic on statutory corporate tax rates around theworld, see: link.reuters.com/qak93w NO DIRECT CONNECTION A closelook at of some of the six deals suggests no direct connection withthe 35-percent U.S statutory rate. For instance, Pittsburgh-basedpharmaceuticals company Mylan is buying the non-U.S. generic drugbusiness of Chicago's Abbott Laboratories to create a combinedcompany incorporated in the Netherlands and managed fromPennsylvania. The Netherlandsâ statutory rate is 25 percent.However, Mylan's global effective tax rates, as disclosed in thecompany's annual reports to investors, were 16.2 percent in 2013,20.0 percent in 2012 and 17.7 percent in 2011. ITEP pegged Mylan'sU.S.-specific effective tax rate at 20.5 percent on average forthose same years, and the Reuters analysis found it to be 19.7percent. When Mylan announced the Abbott deal in July 2014, it saidit expected it to bring many advantages and "to lower Mylan's taxrate to approximately 20-21 percent in the first full year, and tothe high teens thereafter." A spokeswoman for Mylan declined tocomment and referred questions to past statements. In another deal,Steris Corp, based near Cleveland, is buying out the UK's SynergyHealth Plc, with the combined company to be managed from Ohio, butincorporated in Britain where the statutory corporate tax rate is21 percent. Reuters found a 2011-2013 U.S.-specific average taxrate for Steris of 17.2 percent; ITEP's calculation came to 16.6percent. The company has disclosed global effective tax ratesaveraging 32.1 percent for the same period. A Steris spokesman saidthe company expects its effective tax rate beginning in 2016 to beabout 25 percent. "This transaction is not being driven by taxrates,â he said. (For more on the other companies in the study see:Factbox [ID: nL1N0VF1X0]) HIGHEST RATE The U.S. statutory rate ishigh. Tack on an average of state and local corporate rates andit's 39.1 percent. No major country has a higher combined rate. Thenext highest are Japan at 37 percent and France at 34.4 percent.But the U.S. tax code is uniquely complex. Big companies useelaborate strategies to exploit loopholes to cut their tax costs,which they say shareholders expect them to do. ACCT 531 CorporationTaxation The gap between the statutory rate and what companiesreally pay is hard to measure because their tax returns are, ofcourse, confidential. Financial report data can furnish estimatesof effective rates, but there is no standard way to do this. Evenwhen measuring marginal effective tax rates, seen by tax experts asthe best test of business investment decisions, it's hard to knowthe true U.S. tax burdens of large corporations. Most lawmakersagree inversions are a problem because they erode the U.S.corporate tax base. Corporations today only provide about 10percent of U.S. government revenues, down from 30 percent in the1950s. In his 2016 budget last week, Democratic President BarackObama proposed steps to curb inversions and what his administrationsees as the incentives for doing them. The Republican-controlledCongress, however, is unlikely to agree with his proposed reforms,which may be dead-on-arrival. One of Obama's goals is tightening arule that makes business interest tax-deductible and helpscompanies shift profits out of the United States via interestpayments on loans from foreign affiliates. This is known asearnings stripping. Another is ending the "deferral" rule that sayscompanies don't have to pay income tax on active overseas profits,as long as those profits don't enter the United States. Companieshave about $2.1 trillion in profits abroad. Some came from foreignventures; some from earnings stripping, tax experts said. The thirdtarget is abusive "transfer pricing." This involves shiftingprofits out of the United States to lower-tax countries viacross-border, non-market-based payments among the worldwideaffiliates of multinationals. Cutting the 35-percent statutory ratewould not change any of these rules. And no politically realisticU.S. rate cut would be likely to level the playing field with, say,Ireland, which has a 12.5 percent statutory rate and is a populardestination for U.S. companies doing inversions, let alone taxhavens such as Bermuda, which charges no corporate income tax atall. "Until we address earnings stripping and the transfer ofintangible rights abroad, we're always going to have this incentivefor foreign companies to combine with U.S. companies and strip theU.S. corporate tax base,â said Rosenthal. (Reporting by KevinDrawbaugh; Editing by Amy Stevens and Martin Howell)
