US: Big changes proposed to cut tax burden on foreign-earned profits – NAB

The way the US system taxes the foreign earnings of American business has been a sore point for many years, according to analysts at NAB.

Key Quotes

“US business is taxed on its worldwide earnings at the high US corporate tax rate with an allowance for taxes paid overseas. However, US tax is only paid when the profits are brought back into the country so firms that fail to repatriate the money are able to defer paying. With US majority-owned corporations employing over 325000 people in Australia and US direct investment here totalling $A195 billion, far more than any other country, anything that impacts their global operations has to be watched closely.”

“The 2016 “Offshore Shell Games” report estimates that Fortune 500 companies hold nearly $US2½ trillion in accumulated profits offshore for tax purposes. The US Treasury has an even bigger number of around $2.8 trillion. Some big multinationals stand out for the scale of their reported offshore profits – Apple has $US215 billion, Pfizer has $US194 billion, Microsoft has $US124 billion, GE $US104 billion and the top 30 in aggregate have $US 1.6 trillion.”

“Much of this money is held in a small number of locations, often places not immediately associated with big offshore-controlled manufacturing operations but which are often seen as low tax jurisdictions. Bermuda, the Caymans, the British Virgin Islands, the Bahamas and Luxembourg feature prominently among US multinationals offshore profit centres. By contrast, the profits earned in big advanced economies with a large presence of US multinationals can come in lower than in well-known centres noted for their low corporate tax rates. US multinational net income in Bermuda, for instance, was twice that in Japan, Germany, France and Italy combined.”

“The debate in the US has long been between those who want tougher upfront taxation of foreign profits and those who think a more concessional treatment of foreign income is needed to encourage US multi-nationals to bring back this income that is “locked out” of the US for tax reasons. Two suggestions are:

1. Another “one-off” offer to US corporates to bring money into the US at a concessional rate. While on the campaign trail, President Trump proposed a 10% tax rate followed by ending the tax deferral allowed on corporate income earned abroad. The administrations April tax plan repeated the idea of a one-time tax break on profits held abroad. This step was tried 2004 with disappointing real economic results.

2. Shifting to a “territorial” system like ours where foreign earned income would not be taxed in the US – another administration proposal in April. Business likes this idea but the Treasury are less keen as “income stripping” could see big revenue losses.”