Tax Analysts Blog

Do U.S. Multinationals Have It Tough?

Posted on May 13, 2013

At the behest of the G20 the OECD has launched a major effort to limit profit shifting by multinational corporations. Some in the U.S. have expressed concern that this OECD "BEPS" (base erosion and profit shifting) initiative has been motivated by foreigners and their governments' desire to bash U.S. multinationals. Google, Starbucks, and Amazon have been the targets of a lot of vitriol in foreign press reports. And it is this public outcry over these press reports that has sparked the United Kingdom, France, and Germany to get the OECD involved.

During three sessions held on May 10 and May 11 at the American Bar Association Tax Section meeting in Washington a lot of attention was given to the politics behind the thrust for tougher rules on multinationals. Left-leaning advocacy groups ("rabble rousers" according to one speaker) have done a good job of advertising that multinationals are "allegedly" not paying their fair share of tax. (The speakers seemed very careful to not offend multinationals.) It was noted that Americans do not appreciate the public pressure to raise taxes on corporations in countries where austerity has been painful and contentious. If governments do not respond, they will lose elections. The folks working on the OECD project see their job as providing reasoned solutions to problems where they truly exist and not to respond to political pressure from the public that does not understand these issues.

But a panel of foreign tax experts did not agree with the assertion that U.S. companies were being singled out. Their interpretation of the current situation was that, yes, U.S. corporations may well have the most to lose if the OECD does recommend tough rules and governments implement them. But this is not because U.S. multinationals are targets. It is because U.S. multinationals happen to benefit the most from tax planning.

On the surface U.S. rules appear much tougher than they really are. The U.S. has a worldwide system that taxes all foreign profits. Most other nations have territorial systems that exempt foreign profits. But we have long known that the all-important details make U.S. rules extremely generous--perhaps even more generous--than a generic territorial system. What we learned at the ABA meetings is that the U.S. system may be more generous than some other real world territorial systems. The troubling situations highlighted by the OECD preliminary report, the speakers noted, are those used primarily by U.S. corporations, not foreign corporations. In addition, U.S. multinationals have a "culture" of aggressive tax planning. And they face a high domestic tax rate (35 percent) that makes profit shifting particularly beneficial.

A German tax lawyer speaking at one session said that Germany did not have any profit shifting problems with its multinationals like the U.S. had. It had anti-abuse rules that were "harsh" and "effective." And the government was introducing more. If this assessment is accurate, it would dispel the widely held notion in U.S. policy circles that German tax rules are more generous than those in the United States. This notion was grounded in reports that in 1998 when Daimler-Benz merged with Chrysler the newly-merged company chose Germany as its headquarters because U.S. international tax rules were tougher than those in Germany.

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