No Taxation Without Ramifications

What's on the watch list for 2011? Plenty.

The Bush tax-cut debate may have captured the headlines leading up to the new year, but there are at least half a dozen lower-profile tax issues that CFOs should keep tabs on, with more to come as the year unfolds.

The most important is, no doubt, the corporate tax rate. Japan plans to cut its corporate rate by 5 percentage points in April, which will give the United States the dubious honor of having the highest corporate tax rate in the world. (The Organization for Economic Cooperation and Development calculates member country tax rates by looking at national levies, and then taking into consideration the deductibility of average state taxes.) As a result, the United States now tops the list with a 39.2% corporate tax rate, ahead of Japan’s 35%.

American companies have long complained that the high tax rate is a competitive disadvantage. To cite but one example, other G7 countries exempt foreign business income — or at least 95% of the income — from the corporate tax base, says Andrew Lyon, a principal in the national economics and statistics group at PwC U.S.

Therefore, Lyon says, CFOs should keep an eye on the proposals from President Obama’s deficit commission (officially, the National Commission on Fiscal Responsibility and Reform), which, among other options, has suggested taking the corporate rate down from its current 35% to between 23% and 29% (although the revenue would have to be made up somewhere else, which might include the elimination of tax credits). Lyon says the tax-rate drop would likely be accompanied by the introduction of an approach long sought by many companies — a territorial tax system (see below).

Marking Their Tax Territory

Congress is taking another look at reworking the tax system, only this time there may be more support for a change. In 2005, the Joint Committee on Taxation talked about revamping the U.S. tax system, moving it from a worldwide structure to a territorial system. So instead of taxing American companies on income generated in and outside the United States, the territorial system would tax income generated within its borders, with some exceptions, which is how many other developed countries run their systems.

A territorial tax system is up for discussion once again, says Stu Anolik, a managing director and tax expert with CBIZ-MHM, who points out that companies generally give a thumbs up to the reportedly “pro-free-market” system. Anolik says a territorial system eliminates the need for complex foreign tax credits, antideferral rules, and the bureaucracy that accompanies both.

Despite the fact that the U.S. tax system is intensely intertwined with the worldwide tax system, expect Congress to take a serious look at alternatives this year. “In light of [the President's]
deficit-commission report, looking at the tax system will be of more immediate concern,” says Anolik. So will consideration of solid tax-deferral strategies, like the one Google employed this year to garner an effective worldwide tax rate of below 3%. How did Google do it? The Internet giant legally moved income generated by Irish subsidiaries to a Bermuda tax haven via Dutch subsidiaries.

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