International Tax Gimmicks

December 15, 2017

International Tax Gimmicks

Weekly Wastebasket | Dec. 15, 2017

Most of the discussion about “Tax Reform” has centered on individual and business rates.

Far less attention has been given to international tax changes, even though they contribute more than $250 billion in revenue (over 10 years) to hold down the cost current proposal.

A little background: The U.S. is one of the few countries that imposes“worldwide” taxation.

That is, U.S. taxpayers (both corporate and individual) pay tax on both their U.S. and foreign income (profits). Taxpayers can also deduct taxes paid to other countries, so taxpayers only pay U.S. taxes on foreign income if they exceed the foreign taxes.

But, corporations get a special benefit.

Corporations only pay U.S. tax on their foreign earnings when those profits are brought back (“repatriated”) to the U.S. Any profits left outside the US are not subject to current tax.

Both the House and Senate bill would end worldwide taxation for corporations. The new system would be “territorial,” which is common outside the U.S.

The high U.S. corporate rate (35 percent) has led many companies to “park” vast profits overseas, where they are not currently subject to U.S. tax. The total amount of US corporate profits held overseas is estimated at $2.6 trillion. Those overseas profits must be taxed once when the U.S. system switches from worldwide to territorial, because those profits were always subject to tax when the money was made. In a future territorial system, overseas profits would never be subject to tax. Not taxing overseas profits when switching systems would be tantamount to tax amnesty for corporations.

Corporations are banking on policymakers to give them at least partial amnesty. Why? Because it has happened before.

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