Tax Reform Must Level the Playing Field for American Companies

With Washington pushing full-tilt on tax reform, it’s time to tackle the unfair tax advantage enjoyed by multinational enterprises. Addressing this longstanding problem could provide a unique opportunity to help domestic U.S. corporations compete on a more level playing field with their global counterparts.

Currently, taxes are only assessed on multinational enterprises, referred to as MNEs, when their income is brought into the United States. But much of their profits are actually siphoned off along the way, thanks to a deliberate chain of financing and logistical stopovers in low-tax countries. And so, even though a final sale takes place in the lucrative U.S. market, MNEs are able to bank much of their profit piecemeal along the way in tax haven countries.

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In contrast, U.S. companies are required to pay taxes on all of their worldwide income. The result is that MNEs retain far more of their earnings, giving them a significant leg up in the global arena.

We hear often of the unfair nature of tax havens, and the actual practice is fairly galling since it means MNEs are establishing distinct entities simply to redistribute their tax liability. An MNE may manufacture its product in one country, but then apportion the product’s financing to a second country, with the insurance contracted in yet a third country, and the shipping in a fourth. These various countries — which maintain notably low-tax rates — are then able to claim portions of the net income.

Such shell games are a rather obvious ploy to avoid corporate taxes. But the key point is that, no matter the intermediate steps, the product is still being sold in the U.S. It’s important to note that thousands of MNEs benefit greatly from access to the robust U.S. marketplace. It’s only fair, then, that these companies should finally pay their fair share in return for such easy money.

The sums of money being shifted away from tax liability are stunning, too. In 2016, it’s estimated that profit-shifting through tax havens reduced U.S. corporate taxes by $134 billion. It’s time for this money to come in to the U.S. Treasury.

To address these glaring inequities, many are now urging the adoption of a “Sales Factor Apportionment” (SFA) system. Such a “destination-based” approach would impose taxes based entirely on the country in which final sale of a good or service took place, without allowing for any intermediary or subsidiary entities. Essentially, U.S. taxes would be assessed solely according to the percent of a corporation’s annual sales generated in the U.S. market. This would negate the ability of MNEs to hide income via way stations in tax haven countries.

The Coalition for a Prosperous America (CPA) has estimated that an SFA tax system could generate an extra $1 trillion in tax revenue over the next decade. The burden of these taxes would fall on MNEs that currently evade U.S. taxes, not domestic companies. And in a further benefit, domestic producers would not be taxed on sales outside of the U.S. market — a significant step toward making them more globally competitive.

It’s time for multinational firms to finally pay their fair share of U.S. taxes. It’s the necessary price for entering the U.S. market. And it would help domestic American companies compete on more equitable terms with multinational corporations — an effort that’s long overdue.

Bill Parks is a retired finance professor and founder of NRS Inc., an Idaho-based paddle sports accessory maker that is 100 percent employee-owned.