International Tax Policy
Under the current federal tax system, firms are taxed abroad by host countries. In May, the Administration proposed ending the practice of allowing U.S. companies with overseas operations to “defer” or delay paying U.S. tax on overseas profits until the money is brought back into the country.
The Administration proposed using the estimated $210 billion it would net over ten years – to help pay for health care reform. TechNet is working with member companies and other organizations to ensure that policymakers did not make such piecemeal changes that would hurt U.S. competiveness.
The U.S. is one of five countries (Poland, Ireland, Mexico and South Korea being the others) whose tax policy is based on the principle of “worldwide taxation” meaning that worldwide income is subject to federal taxes tax regardless of where it is earned. Since 25 of the 30 OECD countries use a territorial system that exempts income earned by foreign subsidiaries exempted from home country taxes that are levied against the parent company, America’s worldwide system puts American firms that are burdened with a higher tax bill at a competitive disadvantage. Japan and the UK are also moving to a territorial system. To remedy this, U.S. code provides foreign tax credit for income taxes paid to foreign governments thereby preventing double taxation. The U.S. policy of deferring taxes on foreign earned income until it is brought into the country allows American subsidiaries to pay the same rate of tax on its operations as the tax paid by the foreign-owned subsidiary but earnings remain reinvested overseas. It levels the playing field.
Changing the tax policy in a manner that makes U.S. companies less competitive overseas would have far reaching affects.
- Nearly 20 percent of all American workers – and nearly half of all manufacturing employees – work for companies that have overseas operations – more than half of the manufacturing U.S. private employment.
- These jobs benefit from the broader marketplace – for every $1 in overseas wages, the wages of their American counterparts goes up $1.84.
- Between direct employment and indirect employment by suppliers and such more than 52 million jobs (44 percent) benefit from American companies that operate in the global marketplace.
Higher productivity means more, better jobs in the U.S. but if tax policies lead to an uneven playing field, the impact will be severe. American companies are likely to reduce capital spending in the U.S. – leading to substantial and unrecoverable reduction in U.S. economy and jobs and the risk of U.S. companies being bought by foreign companies that have a higher cash flow because of lower tax burdens. Silicon Valley would be particularly hard hit. Tech companies spend 80 percent of their operating budget in the U.S. but more than half of their revenue is generated overseas. Putting these companies – profitable, entrepreneurial firms that have contributed more than $1 trillion to America’s GDP in the past decade would be severely limited by changes to the tax policy.
Congressional tax writers have said that such significant changes to the tax code would undermine U.S. companies’ to compete in a global marketplace and should only be considered in the context of broader tax reform that would keep American firms competitive. But with numerous, expensive legislative packages pending and with tax reform expected early next year, the risk for damaging changes remains high.
Deferral allows U.S. companies to compete with other OECD countries that use a territorial tax system in which they do not tax foreign earnings. Placing limitations on deferral will make it difficult for the United States to remain viable in the global marketplace.