U.S. right to walk away from unfair international tax negotiations

Americans probably aren’t paying much attention to the Organization for Economic Cooperation and Development (OECD) right now.

But over the past few months, the OECD has been at the center of tense negotiations between the U.S. and the EU.

At issue is the fact that the world’s multinational corporations continually avoid paying corporate taxes.

It’s infuriating to many governments—that these massive corporations keep earning record profits yet pay little or no taxes. This certainly matters in the U.S., since large multinationals continually skirt billions and billions of dollars worth of taxes each year.

Things just reached a boiling point at the OECD, though, and Treasury Secretary Steven Mnuchin opted to break off negotiations. In congressional testimony last week, U.S. Trade Representative Robert Lighthizer praised the U.S. walkout, saying that Europe “came together and agreed that they’d screw America, and that’s just not something that we’re ever going to be a part of.”

Lighthizer was referring to a collective European decision—in the absence of a new agreement—to consider imposing digital taxes solely on America’s multinational giants, but not on European firms.

Lighthizer is right. America’s trade competitors continually aim for one thing: selling into the U.S. market while buying little in return. And Europe’s latest plan—to unilaterally target America’s tech companies—makes clear that there’s little in the way of multilateral consensus at the OECD talks.

Americans should be troubled by all of this. The U.S. goods trade deficit surpassed $800 billion in 2019 for the second straight year.

And much of that one-way trade is driven by stateless multinational corporations offshoring production to China and other countries. After generating massive profits, these corporations simply park their earnings in offshore tax havens, and thus avoid paying U.S. taxes.

It’s estimated that such profit shifting costs the U.S. Treasury roughly $80 billion each year.

It’s astounding, for example, that Amazon paid zero state or federal taxes in 2018 despite earning more than $11 billion in profits. Dozens of other Top 500 firms also paid no federal taxes in 2018. In 2017, the pharmaceutical company AbbVie reported worldwide sales of over $28 billion, including 65 percent of that in the U.S. alone. But thanks to clever profit shifting, AbbVie actually reported a U.S. “loss” of more than $2.6 billion.

At the same time, however, America’s domestic manufacturers are indeed paying their fair share of taxes. And they’re doing so while competing head-to-head with the very multinationals that pay little or no taxes.

The OECD hasn’t found a meaningful global solution for such corporate tax avoidance.

And that means the United States needs to fix its own problems—and adopt a system the can halt this tax unfairness while recouping the tax revenues that multinationals should be paying.

The answer is for Congress to consider a system known as Sales Factor Apportionment (SFA). Under SFA, companies would be taxed specifically on profits earned in the U.S. market.

Whether a company is registered in Ireland, the Cayman Islands, or the United States wouldn’t matter.

Whatever profits that company earned on sales in the U.S. market would face a corporate tax. Conversely, sales outside the U.S. would not be taxed. That could offer a much needed boost for domestic companies—and eliminate some of the current incentives for offshoring.

The United States is facing serious budgetary shortfalls. Adopting an SFA tax system would bring in much needed federal revenue while helping America’s domestic manufacturers outcompete the very multinational corporations that have moved production overseas.

It would also bring in new sources of revenue without domestic taxpayers shouldering the burden.

If the OECD can’t get the job done, then Washington should start holding multinationals accountable for paying the same taxes as domestic U.S. companies.

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