Multinationals are about to get hit with a big tax penalty for operating in the United States. Is it finally time for corporate tax reform?
On Monday October 5 the OECD will release the “final package of measures for a co-ordinated international approach to reform the international tax system.” These BEPS recommendations (standing for Base Erosion and Profit Shifting) are intended to address “gaps and mismatches in existing rules which allow corporate profits to ‘’disappear’’ or shift to low/no-tax locations, where no real value creation takes place.” In other words, the goal is to make sure that multinationals pay their fair share of taxes globally. This is a laudable objective.
But BEPS also exposes the huge difference between the U.S. corporate tax rate, and that of many of our rivals. According to KPMG, the posted U.S. corporate tax rate, including both federal and state, stands at about 40%. By comparison, the average corporate tax rate in the European Union is about 22%. That includes Ireland (12.5%), United Kingdom (20%) and Germany (roughly 30%). To put this in perspective, a company earning an extra $1 billion in profits in the United States would pay roughly $400 million in corporate taxes, versus only $200 million in taxes if the profits were booked in the United Kingdom. That difference of $200 million could fund thousands of jobs.
Before BEPS, many U.S.-based multinationals were able to legally reduce their U.S. tax bills by shifting income to other countries with lower rates. They used a variety of tax strategies. The result for the companies: Lower effective taxes. The result for the United States: Higher competitiveness, since multinationals could avoid the full brunt of the excessively high U.S. corporate income tax rate. More »