How the US Corporate Tax system outsourced your jobs (part 1)

[FreakinDJ]

Hopefully DU will have enough interest to follow this series exposing the failed Corporate Tax Structure and gain a thorough understanding of the underlying structural problems in our Corporate Tax Code. The following is merely the "Tip of the Iceberg" and typically these are subtle changes in the Corporate Tax Code that have HUGE consequences for working Americans are submitted as single line items of much larger legislation as to escape from view of the General public

Part 1 Corporate Tax Bias against US Manufacturing and Production

Under the current foreign tax credit system, excess credits on foreign corporate earnings can be used to shield Technology income from US Corporate taxation through a process know as “Cross Crediting”. Royalties and management fees are often subject to little or no tax in the foreign country in which the license or service is used. Under the network of US Tax Treaties, withholding rates are usually set at 0% or 5%. However, under current law, because Royalty and Fee income streams are grouped in the “General Limitation” basket, they can absorb excess Foreign Tax Credits generated by other High-Taxed general limitation income. The result is that the United States collects almost no tax on foreign royalties and fees.

To illustrate – the Royalties and License Fees paid by a Japanese subsidiary to a US parent corporation would be fully deductable from the Japanese firm’s corporate income tax, (taxes at a 40.7% tax rate in 2005) and would not be taxed by Japan when paid to the US Parent firm.

Because of these interactive tax features, royalties and fees earned abroad are often taxed at a lower rate then comparable technology income earned in the United States. This creates a perverse incentive to exploit “Intellectual Property” overseas rather then in the United States. Because of Consolidating the number of foreign tax credit baskets from 9 to 2 in the beginning of 2007 under the “American Job Creation Act. This increases the opportunities for cross crediting, giving further incentive to exploit technology abroad rather then United States production.

The rising commercial importance of “Intangable Assets” along with Royalty and Fee income, makes the Tax Policy towards them an important issue. During the 10 year period between 1996 and 2005, US MNC’s (United States MultiNational Corporations) increased their receipts from exports of goods and services by 50%, but increased their receipts from exports of “Technology Royalties and License Fees” by 75%

The use of US Technology abroad is generally good for both US firms and the World Economy, but we see no sense in a tax bias that encourages High Technology production abroad at the expense of High Technology production in the United States.

[Frosty1]

1. Is there a link for this?

Or is this your writing? I would like to follow it.

[FreakinDJ]

2. Here is part of it

http://www.piie.com/publications/chapters_preview/4051/06iie4051.pdf

link doesn't always work all the time because the .pdf is locked. I had to reboot firefox to get it to load properly

[tortoise1956]

3. I'm trying to understand this..

If I have it right, what you are saying is that by shuffling money around from one country to another, they can minimize or avoid tax liability. That, all by itself, makes it a very good strategic move to become a multinational.

It would seem to makes sense for the G(or whatever the hell the number is now) to work out an economic pact to equalize these inequalities and make it harder to avoid liabilities. After all, as it is currently set up, most other countries are losing tax revenues when the money is transferred to the US, while the US is not gaining much of that revenue. Alternatively, the corporate tax code could be restructured to raise the tax burden to an amount that would raise more revenues, while still making it profitable for companies to transfer funds here.

Is this even possible? Or am I being disingenuous and naive?

[FreakinDJ]

4. There are numerous schemes to shifting incomes out of US

I was trying to illustrate those that have the most significant impact on US Job growth.

When Professional Sports Athletes can incorporate himself in a Tax Haven country and then "Hire" himself as an employee of Corporation based in that Tax Haven country - then I would say the "Check Box" approach is failing

But NO - I am not advocating increasing US Corp Tax Structure but rather transferring to a Territorial Corp Tax System that would earn an amount equal to the gross effective Corp Tax Rate while preserving Manufacturing and Production Jobs here in the USA

A United States corporation that undergoes a corporate inversion becomes a subsidiary of a foreign corporation or parent corporation organized in a tax haven country. This tax haven country imposes little or no tax on corporations. The new parent corporation receives income globally and pays U.S. taxes only on the United States income generated by its new U.S. subsidiary, the former United States “parent” corporation. The corporation no longer pays federal income taxes on foreign income.

Another bonus of corporate inversion is that tax-deductible payments transferred from a U.S. corporation to its foreign parent corporation create a tax-free transfer of income to the foreign parent. This legal transfer is known as “earnings stripping”. U.S. tax law attempts to limit earnings stripping, but techniques have been developed to maximize tax-free transfers. U.S. subsidiary corporations commonly pads loan funds transferred to the foreign parent company. Earnings stripping can apply to all types of transfer payments from the U.S. subsidiary to the foreign parent corporation. This includes research and development, labor expenses, licensing, and royalties along with overhead and administrative expenses. The transfers are often very complex with the sole intent to avoid taxation of any kind. In theory, U.S. tax law attempts to reign in the most abusive transfer payments. Corporate transactions provide plenty of opportunity to shift income away from the U.S. subsidiary corporation to the foreign parent corporation.

http://tntalk.wordpress.com/2008/03/31/multinational-corporations-the-power-of-earnings-stripping/

[Mimosa]

5. Wow, I wish this posted on GD.

I think we need to know HOW jobs were taken to China.