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Feb
2014
6

Fixing the Broken System of Offshore Tax Havens? Easier Said Than Done.

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In politics, the populist message of ending corporate tax havens is easy to garner support for. Actually affecting policy to end the practice? Less easy.

President Obama campaigned on closing these types of loopholes but still exist, perhaps as much as ever, and companies still take great advantage of them.  It’s a cycle with no end in sight because if one country decides to raise taxes, another would likely lower theirs to attract the avoiders.  It’s a complicated issue with many remedies, yet none that politicians are willing to commit too.  Richard Rubin and Jesse Drucker have dressed down President Obama’s rhetoric-over-action approach in a new Bloomberg piece, but admit that most prescriptions for this epidemic would bring about a new set of very expensive problems:

Obama’s proposals would limit companies’ ability to defer U.S. taxes on some income they earn overseas, impose a minimum tax on international profits and raise taxes on profits generated from intangibles such as patents.

Even as his administration attempts to prevent companies from moving profits offshore, U.S.-based companies and the government have some shared interests at the OECD, said Robert Stack, the U.S. government’s primary negotiator.

“No one would really have designed the system where you can have the degree of stateless income or low-tax income that we have today,” said Stack, the Treasury Department’s deputy assistant secretary for international tax affairs.

Still, the U.S. doesn’t want hard-to-interpret rules that would lead to expensive tax disputes for U.S. companies or rules that would undercut the U.S. tax base, Stack said.

Experts argue that the nature of the U.S. government does not suggest a change will be swift.  Martin Sullivan, chief economist at Tax Analysts, told Bloomberg:

“There’s fundamental conflict between protecting your multinationals and preventing profit shifting, because it’s your multinationals that are doing most of the profit shifting.  The U.S. Treasury folks are getting pulled in two different directions. That’s a whole other dynamic from the White House talking about companies pushing profits offshore.”

The issue has become a hot topic in Europe where politicians are looking for answers to appease the populous.  The U.S. is a major player though we are doing little to help solve the problem.  Congressional infighting and partisan ideologies are delaying progress and have turned the public’s attention to the Organization for Economic Cooperation and Development (OECD), a government-funded group in Paris seeking to combat base erosion and profit shifting.

Currently, the OECD is drafting plans to limit how companies take deductions in one country without reporting income in others.  They are also seeking to make it harder to shift intellectual property to offshore units.  Yet, there is a reluctance from many in the U.S. government to assist the OECD as they seek laws that meet the standards of international consensus. The treasury department is trying to persuade the OECD towards a middle ground.  Our former deputy assistant secretary for international tax affairs, Manal Corwin, told Bloomberg:

“They are very focused on making sure that this isn’t a disproportionate attack on U.S. multinationals,” Corwin said. “The U.S. government does represent those interests and tries to make sure that U.S. multinationals don’t get inappropriately dragged in or dragged through for political gains by others.”

American companies are growing increasingly worried about the effects the OECD will have on international tax reform.  As countries seek to create quick fixes for the current system they are also simultaneously muddying the waters and creating new problems that will need further solutions:

In December, for example, Italy passed a measure that requires Italian companies to purchase their Internet ads from local companies.

The measure has been nicknamed the “Google (GOOG) tax” because Google credits virtually all the revenue and subsequent profits from advertisements sold in Europe to an Irish subsidiary, which moves the profits to a second unit with headquarters in Bermuda. The strategy helps cut about $2 billion a year from the company’s taxes.

The Italian law is widely viewed as violating European Union laws regarding non-discrimination over commercial activity. The country has delayed the implementation of the new measure until July.
Mexico also recently passed a law limiting deductions paid by subsidiaries in that country to other affiliated companies outside Mexico.

“Countries are already unilaterally making changes,” Schultz (Catherine Schultz, Vice President of the NFTC) said. “U.S. companies are getting very actively involved — because they’re being forced to.”

Read Rubin and Drucker’s important piece in its entirety.

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