A followup here to the post linked here:
If I have profits in Estonia and I re-invest the profits there, the ECTR is 0%.
If I repatriate the profits to the U.S., because there was no corporate tax paid to Estonia to qualify for the “foreign tax credit” I get hit for the full 35% U.S. rate – period.
If the “loophole” of leaving those profits in Estonia (rather than repatriating them) is “closed,” I’m getting hit with a 35% “fee” just for being a U.S.-based corporation.
If the “loophole” is closed, the only way to get away from that fee for the “privilege” of being a U.S.-based corporation is simply to take the enterprise itself out of the country – to Bermuda, or the Cayman Islands, or…. Estonia.
Another way to look at it is that you get a massive tax break for investing money in overseas low-tax jurisdictions rather than the US.
Let’s say that I’m a US corporation faced with a choice between investing in more US business or in an Estonia business. Under the current rules, the US government is giving me a 35% tax break choose Estonia over the US. That seems rather moronic at the moment.
Yes, you can avoid this to some extent by moving to Bermuda. But that creates its own difficulties (among other things, it’s often very bad PR).
Again, I’m nto a fan of Obama. And my preferred solution is to eliminate the US corporate tax altogether (and replace it in a revenue-neutral manner with taxes elsewhere, such as perhaps increased income taxes). But I am not completely outraged by Obama’s proposal.
Enjoy your baseball postings and voted for McCain (so you might guess where I stand vis-a-vis Obama tax proposals). However, I’m also a tax partner at a NYC law firm who has done a lot of cross-border tax work over the last decade (our JDs are of similar vintages). You — and the people you’re linking to — are out of your depth here. It’s not possible to debate tax policy without an understanding of existing law and practice, which are complex. Imagine journalists writing about Con law…
Enjoy your baseball postings and voted for McCain (so you might guess where I stand vis-a-vis Obama tax proposals). However, I’m also a tax partner at a NYC law firm who has done a lot of cross-border tax work over the last decade (our JDs are of similar vintages). You — and the people you’re linking to — are out of your depth here. It’s not possible to debate tax policy without an understanding of existing law and practice, which are complex. Imagine journalists writing about Con law…
JM — If you’re so knowledgable in this area, why don’t you take a shot at sharing your opinions on the matter. Are you afraid Crank won’t be able to comprehend Subpart F and Controlled Foreign Corps. Or are you one of those attorneys that likes to make everything sound more difficult than it is? I am not sure if the last sentence is a joke — about journalists discussing Con Law. God knows only the qualified should tackle the Lemon Test.
“It’s not possible to debate tax policy without an understanding of existing law and practice, which are complex.”
Well, some of us have some knowledge of existing law and practice, so fire away – what exactly don’t you like about the proposals?
JM _ You know another thing that’s really confusing and should only be left to the most qualified: only hitting the post button once when finished writing your comment.
On the subject of loopholes and federal taxes, Obama said this in February:
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WASHINGTON (Reuters) – U.S. President Barack Obama said it would be possible to lower the rate on corporate taxes if the many loopholes in the tax code were closed.
“If you closed loopholes you could actually lower rates. That’s an area where there should be the potential for some bipartisan agreement,” Obama said at a White House “Fiscal Responsibility Summit.”
He said that the tax rate “on the books” was high in the United States.
But Obama added, “In practice, depending on who it is — what kind of accountant you can hire — they’re not so high. That’s an area we can work on,” Obama added.
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Now if he really wants to do this in a bipartisan manner, he’ll package the “loophole closers” and business tax cut in the same bill. The devil, of course, will be in the details, but if he really is serious about cutting the corporate tax rate, he’ll package the whole thing together.
JM,
Be careful challenging right-wing theology; they bring the wrath of Rush down on you.
“Be careful challenging right-wing theology; they bring the wrath of Rush down on you.”
…only he hasn’t challenged anything – just pointed out that the rest of us are minor leaguers compared to him, for reasons, I guess, we just need to take on faith.
That’s a fair criticism, so here are my problems with the postings.
The tax posting with the Finland example was misleading — because of foreign tax credits, a dividend from a Finnish subsidiary would (in theory) be wholly or in large part tax-free. Sometimes (often?) theory breaks down and there’s no tax or double tax, but the point of the Finland example was to make a bold statement about double taxation and not to quibble about holes in the foreign tax credit system. But it’s bogus because it ignores foreign tax credits.
The second example substitutes “Estonia” for Finland to justify its fake premise (the 0% tax country; anyone know Estonia’s stated corporate tax rate?) and permit it to ignore foreign tax credits. A more realistic scenario is that the US company has been using a finance subsidiary in Hong Kong or Luxembourg or Cayman to strip earnings out of China or Germany or wherever, and this money has never been taxed. So it sits in a tax haven company, and probably is reinvested offshore taxfree. But if it comes back to the US it’s taxed. Does that make sense? I don’t know, but it’s arguably rationale and not unique (UK and Ireland also have credit systems for offshore earnings). Does it impair the competitiveness of US-based businesses as compared to those in Germany or the UK? I don’t know, but I doubt that it has much effect as compared to, say, SARBOX; I am guessing that Crank and most securities lawyers would agree me there. Would I change the law to tax earnings that stay offshore? No, because US businesses have evolved in the present system and to whack them with a huge tax hit seems stupid, particularly now. But that does not justify sloppy or strawman arguments.
Of course there are jurisdictions with low or no taxes. This happens in some developing countries which sometimes make deals with major investors. And there are some developed countries with low rates, such as Ireland (a tax haven in the north Atlantic populated exclusively by lawyers, tax accountants, and leprechauns). But these are outliers.
Patrick — “Subpart F and Controlled Foreign Corps” are one and the same thing, and are not a real issue for most multinationals. The real issues for most multinationals are earnings stripping and foreign tax credits. Ie, move as much taxable profit as efficiently possible to low and no-tax jurisdictions. When you do bring earnings home to the US, maximize your ability to offset US taxes with credits (mix repatriation of low-taxed foreign income with high-taxed foreign income). All multinationals play the first part of this game, and even those from non-credit systems often play variations on the second.
That’s it for me. In the future I will be more careful about shooting off my mouth…
JM – Thanks for the post.
You state:
“Would I change the law to tax earnings that stay offshore? No, because US businesses have evolved in the present system and to whack them with a huge tax hit seems stupid, particularly now.”
I like the law because it eliminates the tax advantage of keeping investments out of the US – I’d rather see tax neutrality on that score – but I see your point. It might make sense to pass the law but delay it’s implementation a few years. That will give the economic crisis time to pass and give corps some time to plan around it.
Plus, if Obama passes this law with a corresponding reduction in the corporate tax rate, it would be more palatable. Of course, the devil is in the details.
Thanks JM — that was a good summary. Please send the bill to Crank.