GOP Moves to Crack Down on Corporate Tax Dodgers

House bill would make it harder for multinational corporations to shift profits to overseas affiliates

by Brendan Kirby | Updated 08 Nov 2017 at 6:46 AM

Under the Republican tax bill introduced last week in the House of Representatives, giant multinational corporations get a fat tax cut — but also the threat of a stinging new levy if they continue commonly used tax-avoidance schemes.

The hope of tax writers was that the threat of a 20 percent excise tax on the sale of products from foreign subsidiaries to the parent companies would persuade businesses to move more of their operations to the United States, boosting economic growth, which would create new jobs and raise workers’ wages.

Corporations with operations in multiple countries often employ a variety of methods to reduce their tax burden in America, where the top 35 percent rate on corporations is the highest in the industrialized world. The Tax Cuts and Jobs Act would levy the 20 percent tax on payments made by U.S. companies to foreign affiliates.

The proposal has sparked a tremendous backlash from businesses and their lobbying groups and may not survive in the bill that emerges as early as Thursday from the House Ways and Means Committee. Rep. Kevin Brady (R-Texas), the committee's chairman, proposed changes in a so-called manager's amendment that would narrow the scope of the excise tax.

"All of this is very fluid as to what they are proposing," said Adam Michel, a policy analyst at The Heritage Foundation.

Republicans hope to put tax reform legislation on President Donald Trump's desk by Thanksgiving.

Under current law, multinational corporations often avoid taxes by shifting profits to overseas affiliates. The original version of the bill proposed slapping a 20 percent excise tax on products sold from subsidiaries to parent companies. The hope was that it would encourage companies to produce more in the United States and merge with their foreign affiliates and subject them to American taxation.

Paying the 20 percent excise tax would be much costlier because it would not allow for deductions available under the corporate tax. For example, if a subsidiary sold a part to a U.S.-based corporation for $1,000, it would have to pay 20 percent on the full amount, or $200. But if the subsidiary became part of the U.S. tax system, it could deduct the costs of producing that same $1,000 part. If those expenses amounted to $800, for instance, the company would pay 20 percent only on the $200 profit — $40.

"I find it potentially fascinating," said Alan Tonelson, an economic policy analyst who long has advocated policies to give incentives for more domestic manufacturing. "I find it potentially fascinating because it could be a major revenue enhancer. It could have been a clever replacement for a border adjustment tax."

Republicans for months toyed with the idea of including the border adjustment tax in the reform bill. It would have imposed a tax on imported goods and services, prompting critics to call it a tariff. It also would have included an export subsidy on products shipped abroad.

The bill released last week has no border adjustment tax, and Brady has insisted that the proposed excise tax is nothing like it. But Tonelson, who writes about the economy in his RealityChek blog, told LifeZette that the new proposal would have many of the same results.

"It looks to me as if … these purchases [by subsidiary from the parent company], that they deal with them through ordinary tariffs," he said.

Tonelson said such "transfer pricing" maneuvers allowed Honda's U.S. subsidiary to show no profit in some years in the 1990s.

Michel, the Heritage analyst, said he believes the original excise proposal goes too far.

"It does introduce yet another aspect of complexity," he said. "The international tax system is already so incredibly complicated."

Michel said another so-called base-broadening feature in the bill could accomplish the same goal in a less onerous way. It would subject multinational firms' "super normal" foreign profits to additional taxation. Under the formula in the bill released last week, the bill effectively would impose a 10 percent tax on all profits above 7 percent plus the short-term federal interest rate.

That, in addition to reducing corporate tax rates to competitive levels, would go a long way to stopping tax dodges, Michel said.

"This bill would largely stop that activity, and I would hope to actually see the trend reverse," he said.

Grover Norquist, president of Americans for Tax Reform, agreed with the "base erosion" problem. He said he is confident that Ways and Means Committee staffers and lawmakers will be able to come up with an acceptable compromise.

Norquist said the bill overall likely would not prompt companies to close foreign factories and move operations to the United State. But he said it likely would tip the balance for a company that has factories in the United States and a foreign country and is looking for a place to open a third plant.

"What you will see is fewer companies leaving the United States," he said.

Norquist said conservatives evaluating the details of the Republican tax bill should not compare it to the status quo but to the $1 trillion in tax increases that 2016 Democratic presidential candidate Hillary Clinton proposed. He offered the analogy for a mathematical word problem measuring a train headed west from Chicago and a train headed east.

"If Hillary had won, we'd be out in Wyoming," he said. "With Trump, we're moving into Ohio."

Norquist added that Republican lawmakers should not worry about trying to woo moderate Democrats.

"There are no Democrats who want to cut taxes," he said. "The difference between the two parties is taxes."

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