Taxing Multinationals and the Kerry proposal

George Mundstock’s 9th installment (August 2, in “US Taxation of Multinationals” goes after corporate inversions. Recommened reading also includes the prior eight installments as George is excellent. Earlier, I noted his July 19 piece on ETI “Leave No Corporation Behind”, which preceded US Taxation of Multinationals. For now, let me pass along part of his July 30 piece called “Kerry, Exporting Jobs, and Taxes”:

There is an important point in the Kerry website note: The US respecting foreign subsidiaries rewards outsourcing. By “outsourcing,” I mean a US business having an independent foreign business provide goods or services for the US business that, historically, the US business provided for itself. To the extent that (i) the independent foreign business is in a low-tax country and, this may be unlikely, (ii) those low taxes are reflected in lower prices from the foreign business, little can be done to reduce the US tax incentive to export. But, under current law, outsourcing makes it easier to move the extra profit in a multinational — which, in this context, most would view as profit attributable to non-asset intangible value, like know-how and non-patented technology — outside the reach of an immediate, full US tax. Kerry’s proposal to look through foreign subsidiaries would get at this incentive to outsource.

It is important to note that full look-through does not eliminate all incentives to move offshore. Most obviously, there still are problems from the averaging of foreign tax rates for purposes of the limit on the foreign tax credit. (This was discussed in an earlier post.) For example, a US business with operations primarily in high-tax countries still will be able to avoid all tax on some item of US income by moving the US income to a law-tax jurisdiction. Similarly, a US business with operations primarily in low-tax jurisdictions can move US income to a high-tax jurisdiction at no extra tax cost. These problems will be worse once the ETI bills become law, as they cut back on the 1986 restrictions on averaging.