US’s high tax rates keep profits trapped overseas

By Liu Tian Source:Global Times Published: 2015-3-26 19:08:02

Reforms would aid American multinationals, govt


Illustration: Lu Ting/GT



The Wall Street Journal reported earlier this week that US-based multinationals sent an estimated $300 billion in foreign profits back to the US in 2014, the most in nearly a decade.

The reason why the news is so interesting is that almost all US multinationals have been reluctant in recent years to return their overseas profits to the US. Some have even accelerated plans for "tax inversion" via cross-border mergers. This happens when an enterprise relocates its legal domicile to a country with lower corporate income taxes, but still retains its operations in its higher-tax country of origin. In this way, enterprises can cut down their corporate income tax bills.

As of April 2014, US multinationals had about $2.1 trillion in profits socked away abroad, according to statistics from Audit Analytics, a research institute. GE had the most - up to $110 billion - with Microsoft, Apple, and the pharmaceutical giants Pfizer and Merck following on its heels.

US multinationals can come up with a series of reasons to explain why they resist sending overseas profits back. The rally of the US dollar is just the latest. The US dollar ended 2014 with a rise of about 13 percent against a batch of major currencies, according to Reuters. The appreciation of the dollar will cut into enterprises' profits since that money - which is mostly in foreign currency - has to be converted into US dollars once it is returned to the US.

The more important reason is that the extremely high taxes in the US make US multinationals more inclined to keep their overseas profits outside the US.

First, the current federal corporate tax rate is 35 percent, and local government tax rate is 4.1 percent on average. That is to say that US enterprises have to pay a corporate income tax rate of up to 39.1 percent - the highest of the 34 countries in the Organisation for Economic Co-operation and Development. The average corporate tax rate for these countries is 25 percent, according to media reports.

Second, the actual enterprise income tax rate for the US's main trading partners is generally 20 percent, according to media reports citing data from the US National Bureau of Economic Research. So it can be seen that US multinationals have a good reason to keep their profits abroad in low-tax countries such as Ireland, Switzerland, Holland, Luxembourg and Bermuda, rather than send them home and pay 35 percent in taxes.

Under the current system, US multinationals can indefinitely postpone paying income tax on these profits as long as they keep them overseas.

However, the US government is unhappy to see companies taking steps toward "tax inversion." The administration of US President Barack Obama hopes to increase revenue by levying taxes on US multinationals' overseas profits in order to fund domestic infrastructure projects.

A proposal submitted by Obama in February suggested investing extra $478 billion in the infrastructure projects.

The US government has been committed to formulating a policy recently aimed at levying a mandatory tax on the overseas profits regardless of whether they are sent to the US.

This advice has been included in Obama's 2016 Budget, which calls for a one-time, 14 percent tax on an estimated $2.1 trillion in profits that has piled up abroad over the years and seeks to impose a 19 percent tax on US companies' future foreign earnings, Reuters reported.

However, it is still uncertain whether the proposal can win approval from the US Congress.

Basically, what the US government should do now is reform its tax system.

To begin with, US multinationals are frustrated by the high corporate income tax that cripples their competitiveness overseas since their headquarters have to pay more taxes in the US.

After all, nearly 40 percent of S&P 500 companies' profits come from markets outside the US, according to a media report citing data the Deutsche Bank released in October.

Overall, the large-scale return of overseas profits in 2014 is just a temporary phenomenon. It is unsustainable.

A long-term or permanent reduction of taxes on the overseas profits is a more attractive solution for US multinationals, enabling these companies to automatically return profits to the US to buy back stock, update factories and equipment, and fund daily operations - activities that can help to revive the US's manufacturing industry. It would help the US government increase its own revenues as well.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn

    

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