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1. Thomas C CEOExpressSelect Member
     (11/21/2017 9:47:08 AM)
     Message ID #294042

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"Liberals are denouncing Republican tax reform as a giveaway to big corporations, as they always do. But the irony is that the Senate and House bills would do far more to stop corporate tax gaming than anything the Obama Administration did in eight years. This includes preventing tax avoidance, levelling the tax field for U.S. multinationals, and stopping corporate inversions.

Start with cutting the corporate rate to 20% from 35%, which in a stroke offers less incentive for companies to move capital, income and intellectual property out of the U.S. to lower tax climes. During the Obama Administration, many U.S. companies “inverted” by merging with smaller foreign competitors to take advantage of lower tax rates abroad. The U.S. has the highest corporate rate in the developed world, whose average is 25%.

Inversions seek to make American companies more globally competitive and let them reinvest in the U.S. tax free. Under the current U.S. worldwide tax system, companies can defer taxes on their overseas profits until they bring them home—and then get smacked with the full 35% rate. Hence, corporations have parked $2.5 trillion or more abroad.

Both Senate and House bills move to a territorial system that exempts most foreign income from taxation. Most advanced economies have territorial systems, but they also have safeguards—i.e., base-erosion rules—to prevent abuse. Without these rules, companies could shift domestic income through foreign affiliates to lower tax jurisdictions and then bring the profits home without paying taxes.

The House and Senate bills would impose an effective 10% rate on intangible property of U.S. multinationals that is held overseas. In return, U.S. companies like Apple and Google would be able to repatriate their income tax free. The Senate bill also creates a virtual patent box to entice foreign companies to move their patents to the U.S. by taxing their subsidiaries’ royalties at 12.5%.

Both bills would also prevent foreign multinationals from abusing “transfer pricing”—that is, inflating the price that their U.S. affiliates pay to license IP in order to shift profits overseas. U.S. companies can deduct these payments, and their foreign affiliates then pay taxes at lower rates. The potential for tax arbitrage is greater for IP since it’s hard for government authorities to value. What is a reasonable royalty for a patent? Apple will surely differ from the IRS.

To deter tax avoidance, the House bill threatens a 20% excise tax on all payments from U.S. affiliates to related foreign companies. However, American companies can avoid the excise tax by declaring the payments “effectively controlled income,” which would then be subject to the U.S. 20% corporate rate minus expenses and foreign tax credits. The bill would be minimal for most companies that aren’t exploiting tax havens, but would nonetheless prevent tax arbitrage.

-WSJ Editorial Board 11/19/17
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