Should the US Lower Tax Rates on US Multi-National Corporations?

Should the US lower its tax rates to allow US multi-national corporations (USMNCs) to repatriate earnings allegedly re-invested offshore?

In the news, several USMNCs are lobbying the President and Congress to further lower the tax rate on repatriation of earnings allegedly re-invested in offshore operations that was proposed by the White House to be taxed at 15%.  This Reuter's Article, suggests that the USMNCs are seeking to lower the current 35% tax rate on repatriation of earnings to 3.5% tax rate on earnings already invested abroad in illiquid assets, such as factories, and 8.75% tax rate on earnings cash and liquid assets.

The Reuter's article speculates that the repatriated earnings/cash and taxes raised from the repatriated earnings/cash could raise tax revenues and funds the expansion of the US economy:  "If the $2.6 trillion overseas were repatriated at once, two things would happen.  First, Washington would get a big jolt of tax revenue.  Second, repatriated profits not collected by the Internal Revenue Service could be put to use in the economy."

The last time the US had a "tax repatriation holiday" was in 2004-2005, and the results of the tax repatriation holiday show that the alleged reinvestment into the US economy by the USMNCs that took advantage of the 5.25% lowered rate on the repatriation of earnings did not occur.  In 2001, as noted in the Reuter's article, the Senate held a hearing into the effects of the 2004 repatriation holiday and determined that the repatriation cost the US treasury at least $3.3 billion in net revenue over 10 years and produced no appreciable increase in U.S. jobs or domestic investment.  Instead, the repatriated funds were used to buy back shares and to pay executive bonuses.

Finally, the Reuter's article notes that this may be an effort of lobbyists for the USMNCs to signal the log fight ahead to achieve the new repatriation tax holiday by initially setting the percentages low, and therefore reaching a "compromise" at a slightly higher percentage.

The Reuter's article raises a fundamental question, namely: Should Congress and the President be considering passing tax reform implementing a reduced tax rate for the repatriation of earnings, or should we be looking at other ways to reform the current corporate tax "imbalance" problems, when there are no benefits (as reflected in the most recent tax repatriation holiday)?

This Bloomberg article suggests that the benefits of a tax repatriation holiday touted by USMNCs are just myths as follows:

1. The article stats by quoting Trump's economic advisor touting that the repatriation of earnings will cause a boost to the U.S. economy.  Contrast this statement with the Senate PSI findings of fact in its 2001 study on the 2004 tax repatriation holiday, where the Senate PSI determined that after repatriation over $150 billion dollars, the top 15 USMNCs actually reduced its workforce by 20,931 jobs.  Also there was no new R&D expenditure by the top 15 USMNCs that took advantage of the tax repatriation.
2. The article then states that companies have been borrowing funds in the US at historic rates and that any perceived additional tax revenues would have to be low enough to incentivize the companies to forego borrowing the money and repatriating the offshore earnings/funds.  Contrast this point with the Senate PSI findings that the repatriation holiday actually reduced tax collection by $3.3 billion over 10 years, and leads to the conclusion that a tax repatriation holiday would not generate tax revenue because the tax rate would have to be so low, and historically speaking there would be a net loss over 10 years of taxable revenue attributable to the tax holiday.
3. The article points out that the borrowed funds by USMNCs have been used for stock buy backs and executive bonuses.  Compare the use of the repatriated funds from the 2004 tax holiday which were almost exclusively used to fund stock buy backs and executive compensation with the current use of borrowed funds by the top USMNCs and this suggests that any repatriation holiday will continue this trend.
4. Finally, the article points out that clearing a supposed hurdle to the repatriation of offshore earnings (lowering the tax rate) may not incentivize USMNCs to repatriate the funds because they have operations overseas, or may continue to benefit from the sequestering of offshore earnings in lower tax jurisdiction.  Compare this myth with the Senate PSI findings that post 2004, more USMNCs increased, not decreased, their offshore earnings accumulation rate.

Both articles suggest that repatriation of offshore earnings at a lower rate for USMNCs, when coupled with the Senate PSI findings, reflect unsound US tax policy.  However, it appears as if Congress and the White House continue to buy into the myth that the USMNCs are perpetuating that a repatriation tax holiday is the remedy that will increase the US economy, generate more US tax dollars and spur economic growth.  Despite the message the USMNCs are sending, Congress and the President should look at historical data to see that the myth of a one quick fix solution (repatriation tax holiday) is a failure.

If you know of any company or individual that has sheltered funds offshore, and would like assistance in assessing and filing your IRS whistleblower claim, please CONTACT US.  The IRS Whistleblower Program pays between 15-30% if collected proceeds when the IRS proceeds based on a whistleblower's substantial and credible information.

Is True Tax Reform Likely in 2017?

Is true Tax Reform likely in 2017?

As recently released (See USA Today Article, and White House website), the President would like to pass a tax cut package.  The tax reform proposed by the President plans on addressing the following changes:

1. reduce the top rate on business income to 15 percent, from the current 35 percent rate on corporate income and 39.6 percent rate for other businesses;

2. cut individual income tax rates;

3. raise the standard deduction; abolish the alternative minimum tax (which snagged Trump for over $30 million in 2005, according to tax return data leaked a few weeks ago); and

4. abolish the estate tax.

Analysis of the Plan

See this article by William Gale, Hillary Gelfond and Aaron Krupkin of the Brookings Institute, which attempts to analyze the President’s Tax proposals.  Their analysis reflects 4 problems of the Trump Tax Reform Plan, as they see it:

1. The Trump plan would balloon the federal budget deficit. The article cites an analysis of the Trump campaign’s tax policy plan nu the Tax Policy Center that estimates a $7 trillion deficit over the first decade. The article also cites a guess by the Center for a Responsible Federal Budget stating a deficit of $5.5 trillion over 10 years.

2. The Trump plan would create the largest tax shelter for businesses. The article states that the plan would encourage business owners to cut wages and pay profits instead of wages. The article points out how despite the Trump Administration’s position to limit income shifting, the policy would encourage income shifting and how income shifting would be difficult to block.

3. The Trump plan would create a race to the bottom for corporate rates. The article explains that while the US rate would be lower than most other countries, history has shown that the other countries would just enact changes and lower their corporate rates, so that the perceived benefits of lowering the US rate to match international tax rates would be minimized.

4. The article claims that the Trump plan is very regressive. It claims the Trump plan would give huge cuts to the wealthy and virtually nothing to the low-income households.

Likelihood of Passage:

Regardless of the effects of the proposed Trump Tax Plan, one author doubts that the President will be able to implement his proposed tax reforms.  In his Law Review article in the Illinois Law Review, Daniel Hemel argues that the President likely won’t be able to implement the reforms because of key obstacles: 

1. President Trump has failed to fill key tax policy positions at the U.S. Treasury;

2. President Trump’s refusal to release his own tax returns has provided the opposition and/or moderate Democrats with cover from supporting his tax plan;

3. President Trump’s Tax Plan deviates dramatically from other Congressional tax reform plans and alienates Congressional members; and

4. Because President Trump doesn’t have the requisite support to avoid a filibuster in the Senate, he must use the budget reconciliation process to propose his tax reforms, and that further alienates Congressional members.

Hemel starts his article by citing that former Presidents Reagan and Bush (George W Bush) did not have majorities in both the House and Senate, but were able to pass tax reforms by day 206 of Reagan’s presidency and day 139 of Bush’s presidency.  

With respect to the first obstacle, Hemel states that President Trump has yet to fill key tax policy positions at U.S. Treasury, citing this Vox article, but that President Reagan’s nominee was confirmed on day 67 of his presidency (March 27, 1981) and President Bush’s nominee was confirmed on day 41 of his presidency (March 1, 2001).  Hemel states President Trump is pushing his tax reform policy without a tax policy team in place.  

Additionally, Hemel states that the President’s refusal to release his own tax returns has provided cover for moderate Democrats facing re-election to oppose the President.  Hemel states that President Trump’s refusal to follow tax transparency permits the Democrats to use a sound bite, namely, “we won’t vote for tax cuts until you release your returns”, and transform opposition to tax cuts (usually a political liability for Democrats) into a political asset by claiming that support is unwarranted unless the Democrats can see the effects of the President’s proposal on the President’s returns.  

Hemel also argues that President Trump’s plan fails to build support even within his own party’s Congressional leaders, as it deviates from other highly publicized and analyzed Congressional plans.  Hemel argues that instead of using House Speaker Paul Ryan’s 2016 proposed tax reform plan or Senator Orrin Hatch’s proposal as the Chair of the Senate Finance Committee, Trump has discarded the work done by the Congressional republicans and has forged an independent tax reform proposal that will ultimately depend on the same Congressional leaders he alienated to pass his proposals. 

Finally, Hemel argues that by lacking the support in the Senate to overturn a filibuster, Trump must use the Budget Reconciliatory Process, which limits legislation that would create a deficit outside a 10 year period from the passage of the legislation (so a temporary bill that would have no long term impact on the budget).  Hemel argues that since the Trump Proposal implies huge budget deficits, the Trump proposal may face opposition from Republicans deficit hawks, let alone Democrats, and so this is another reason why Trump’s tax reform plan is highly unlikely.

Alternative Explanation of why Tax Reform is unlikely in 2017:

In addition to Hemel’s article, Bloomberg’s Jonathan Bernstein, adds 7 reasons why tax reform is unlikely based on the Republican’s inability to repeal Obamacare (aka the Affordable Care Act).  Bernstein cites the following 7 reasons:

1. Trump Doesn’t Care about Policy: Bernstein cites President Trump’s appearance on Face the Nation discussing healthcare as evidence that President Trump is only focused on buzzwords and doesn’t care about the nuts and bolts of the policies.

2. Trump isn’t getting much help: Bernstein cites the fact that it appears as if the White House and the rest of the Trump Administration have not been involved in the negotiations regarding health care. He questions how a one page tax plan will spur tax reform by Congress.

3. Watch the House of Representatives: Bernstein argues that the real players are in the House and not the White house.

4. Congressional Districts Still Matter: Bernstein argues that House members still consider the impact of decision would have on their constituents and re-election prospects.

5. Congressional Republicans aren’t really good at policy: Bernstein argues that House Republicans still don’t understand tax reform to know how to implement actual tax reform. He states that many House Republicans still rely on party, committee, or faction leaders to assess the value of legislation.

6. Side deals aren’t happening in the House: Bernstein argues that House leadership is unable to provide the requisite inducements for House members to vote together to repeal Healthcare, and which can also cause the same problems or tax reforms.

7. Caring about the issue at hand matters: Bernstein argues that few Republican politicians advocated for the repeal of healthcare because that’s not what they really wanted to accomplish. He states that tax reform/cuts might be different to motivate House Republicans to enact change, but that still remains to be seen.

These two different viewpoints cast doubt as to whether real tax reform will occur in 2017.  

CONTACT US TO FILE YOUR TAX WHISTLEBLOWER CLAIM

Irrespective of your personal feelings about the Trump Tax Plan or the likelihood of its passage, If you have SPECIFIC AND CREDIBLE information of someone who is not paying their taxes, CONTACT US to discuss the filing of a Tax Whistleblower Claim on your behalf.  The IRS pays between 15-30% of the proceeds it collects from the tax violators if the IRS uses your information.  

Recent Developments

This blog will attempt to re-cap the following newsworthy stories:

1. Transfer Pricing Backlash?
2. Amazon v. IRS

Transfer Pricing Backlash?

As Previously discussed in this Blog, United States Multi-National Corporations (USMNCs) have been using transfer pricing to stash profits overseas and to avoid U.S. and State taxation.

Recently, one state treasurer is attempting to fight against the USMNCs.  In his April Newsletter, Illinois State Treasurer Michael Frerichs advocates for accountability for USMNCs that interact with his office.  Mr. Frerichs states that he is in the process of sponsoring a bill in the Illinois legislature that would prohibit companies from doing business with Illinois if it utilizes offshore accounts to avoid paying taxes.

Mr. Frerichs proposal raises several questions including:

1. Are more states willing to undertake such measures to ensure that USMNCs pay their fair share?
2. Is Illinois willing to enforce this law against companies that are based in Illinois and notorious for using foreign subsidiaries and accounts to hide profits from taxation?
3. Why isn't the federal government utilizing this method to ensure better compliance by the USMNCs?
4. Will this matte if the US lowers the corporate tax rate to permit USMNCs to bring back the amounts stashed offshore at a reduced rate?

While the answers to these questions are mere conjecture at this point, given the fact that the proposed law has not been passed to ensure compliance by USMNCs doing business with Illinois, it is still refreshing and a welcomed change of pace to the usual rhetoric of allowing USMNCs to continue to stash taxable income offshore.

Amazon v. IRS

In a recent Tax Court opinion (Amazon.com, Inc. v. Commissioner of Internal Revenue, 148 T.C. No. 8 (2017)), the Tax Court held that IRS overstepped its authority in applying a discounted cash flow method to value a cost sharing arrangement between Amazon and its subsidiaries.

This cash involved whether Amazon properly valued an intangible it sold to its offshore subsidiary. The IRS felt that Amazon did not properly value the intangible and sought to apply the discounted cash method to value the intangible.  Why did the IRS take this approach? Simple, because it meant that Amazon would have had to recognize more income from the sale of intangible in the US and therefore would also have had to pay more taxes.

Amazon disagreed with the IRS. Amazon stated that the IRS' method violated established precedent in Veritas Software v. Commissioner, 133 T.C. No. 14 (2009).  In Veritas, the issue before the Court was the proper buy in the subsidiary was required to pay as a result of a cost sharing arrangement.  In Veritas, the Court held that comparable uncontrolled transaction (CUT) was the proper valuation method.  Similar to Veritas, Amazon stated that the proper method utilized in its case should have been the CUT method.

The Court held in favor of Amazon.  See this synopsis of the case through the Journal of Accountancy.