Simson: Corporate tax reform — inevitable, at last

Two weeks ago a spat erupted between the U.S. and the EU about some $15 billion in back taxes that Apple supposedly owed Ireland. Some quickly called it an EU “tax grab”.

Analysts and pundits promptly dismissed it because they thought the EU’s “big-brother” regulation against Ireland’s own wishes to enforce it, along with America’s reluctance to agree to it, was doomed to fail. Well, what a difference a couple of weeks make!

That initial reluctance has already waned. Anticipating undesirable consequences, last week the U.S. Treasury issued new guidelines by closing the loophole that Apple — and others — could have used by claiming foreign tax credits for extra tax bills from other countries. “This action protects the U.S. tax base by ensuring that such credits are only available when corporations repatriate their foreign earnings” the new regulation said.

What that means, in essence, is that our own government finally recognized that allowing multinational companies to defer payments to the IRS by holding international profits offshore, until repatriated, was no longer in the national interest of the country. That loophole, if left unchecked, would have continued to erode our tax base while allowing other countries to clamp down on US multinationals’ elaborate tax avoidance schemes.

To be sure, the topic is a very complex one. Corporate tax reform has been greatly controversial in political circles and was stalled again last year, despite practical recommendations by experts including the Simpson-Bowles Commission, former Fed chief Paul Volcker, and the House Ways and Means Committee Chairman Camp, to name a few, who were concerned about what now exceeds $2 trillion worth of untaxed profits.

Yesterday, the Harvard Business School also came up with their 2016 Report on U.S. Competitiveness that framed corporate tax reform, and the need to move toward territorial tax-policy in handling the taxation of international income, as one of the most important ones for economic progress and shared prosperity. One more prodding? Certainly, but perhaps not enough to get our confused political discourse to acknowledge that the high 35 percent U.S. corporate tax rate is not the only obstacle neither to profit repatriation, nor to tax reform.

There is something more profound here that went unnoticed: The U.S. stands alone among all other prosperous G7 nations to still espouse a corporate tax regime wide-open to aggressive international tax-avoidance. The principle of international profits staying untaxed until they are repatriated is at the core of the transatlantic disagreement.

As to the Apple/Ireland controversy, the EU rightfully stands clear that no member states will be allowed to offer preferential treatment to particular firms, such that they can shrink their tax liability unfairly at the expense of other member states. In the case of Apple, its effective tax rate in the EU fell below 1% (versus an effective tax rate of 26% in the US), thanks to the fiscal generosity of Irish politicians to let Apple get away with huge tax deferrals. The real question is: at whose expense was such magnanimity at play?

Clearly at the expense of other EU member states, most notably Germany and France. There is another and simpler way to frame the issue by probing along three dimensions.

Ireland and Greece stand alone in the EU for still practicing an American-style worldwide (vs. territorial) taxation policy for multinationals. Why? Because the promise of lower (i.e. under-collected) tax revenues helps them attract foreign investments and create jobs.

But weren’t Ireland and Greece the two most prominent fiscal “basket cases” which needed massive and acrimonious EU bailouts in the aftermath of the 2008 financial crisis? Unfortunately, the answer is yes. And, furthermore, they aren’t out of the woods yet.

So, why haven’t these foreign investors and the freshly created new jobs come to the rescue of these fiscally starved countries? Because — and therein lies the rub — the promise of lower taxes is only a temporary attraction and not the durable solution for creating a growing, prosperous and sustainable economy. On September 6th the governor of Ireland’s central bank sternly warned that the country was “especially exposed” to “international shocks.”

At the end of it, each country has to find the right balance between wealth generation and its taxation within its unique government budgetary needs. There is no accounting magic, no tax gimmicks there. Just plain, hard work which needs to be guided by a well thought-out, country-specific, economic policy in the creation and sharing of national prosperity.

Thanks to the Apple/Ireland/EU controversy our Treasury department made a reasonable and inevitable move: the loophole with international tax credits is now closed. This now sets the scene with heightened urgency for corporate tax reform, along with associated taxation policies for the incomes of individuals and small companies. Something that the new administration will have to undertake promptly in early 2017.

Moris Simson, a renowned former technology executive, is a fellow of the IC² Institute at the University of Texas.

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