Had Senator Kerry been elected President, we would be talking about his proposal to reduce the corporate tax rate to 32% and to eliminate the deferral benefits under Subpart F, which would have reduced the temptation to abuse the transfer pricing regulations under section 482. Instead, there is much discussion of The American Jobs Creation Act, including my own, which may have been a bit premature.
I say premature as recent discussions of this new law suggests that for most domestic sectors, all profits will qualify for the “qualified production activities income” (QPAI) deduction, which will be only 9%. So most companies will have an effective tax rate equal to 91% of 35% or just under the 32% tax rate that Kerry was proposing. Exceptions remain, however, such as food and beverage companies with retail activities as well as power, water, and natural gas producers with transmission and transportation activities. The profits from service activities also would not qualify as QPAI.
But why distinguish between value-added created in most of the U.S. economy versus certain types of value-added created in these sectors? Those sectors with this type of value-added would have to face both higher effective tax rates and compliance headaches if the IRS accuses them of abusive transfer pricing to get their tax rates down to the levels of companies without these types of value-added activities. As if the IRS was not already too busy given its limited resources.
The Kerry plan was both simpler and had the added benefits of accelerating the taxation of profits shifted to offshore shelters under provisions of section 482 such as Cost Sharing – at least as far as how it is practiced. But now I hear that the IRS is seriously considering letting the QPAI deduction apply to this income as well. If the deduction applies only after the income is repatriated, then this IRS consideration is sensible. But if the deduction applies before the repatriation of income, Congress has only enhanced the opportunities for tax accountants to rip-off the Treasury with more transfer pricing abuse.
Of course, the Bush Republicans now say they want tax simplification. But aren’t these the same fellows that have passed all sorts of loopholes for the rich over the past four years in a matter that have made the tax code more complex? Maybe Congress passes such convoluted tax laws to increase the demand for tax attorneys.