Fit to Be Tied

Corporate America and Uncle Sam may finally see eye to eye on tax reform.

Whoever champions the issue will have to contend with several long-standing problems, of which two are particularly thorny: the debate over a territorial versus a worldwide system, and the details of revenue neutrality.

Unlike most industrialized countries, which have a territorial tax system that doesn’t tax profits earned outside their borders, the United States has a worldwide system that does, although it tempers the impact in two ways: companies get a credit for taxes already paid overseas, and they can defer taxes on foreign profits until they are repatriated to the United States. But critics say this approach encourages domestic companies to keep profits offshore, and that the United States should switch to a territorial system.

“I’d say policymakers are interested in it, but they also want to make sure that it really would lead to increased investment and jobs in the United States,” says Drew Lyon, a principal with Big Four accounting firm PricewaterhouseCoopers and a former deputy assistant secretary in the U.S. Treasury Department.

A sampling of effective tax rates by industry

It’s not obvious that it would. While it is true that U.S. companies have more than $1 trillion in earnings permanently reinvested overseas, their decisions to invest outside the United States were not driven entirely, or even primarily in many cases, by tax considerations. Texas Instruments vice president and senior tax counsel William Blaylock endorses the territorial model but notes that his $14 billion company recently expanded a wafer-assembly and
-testing facility in the Philippines largely because it already operated there, knew the country well, and viewed it as a successful place to do business. It made an acquisition in Japan because it was available at an attractive price. And it is investing in the United States, too, recently constructing a 1.1 million square foot wafer-fabrication facility in Richardson, Texas. Upon announcing the plant construction, Texas Instruments said it enjoyed proximity to its corporate headquarters, a positive competitive environment, and access to R&D. Blaylock notes that the company also received a “significant” tax credit from the U.S. Department of Energy.

“Tax is a consideration in any investment decision,” says Caterpillar’s Beran. “But I don’t know of any decision we have made where a major plant investment was ever swayed by the tax part of the calculation. In our business, where margins aren’t that high, labor costs, costs for supplies and raw materials, access to suppliers, and closeness to markets are normally more important than taxes.”

“All Else Is Not Equal”

President Obama has called for “revenue neutral” reform that generates the same level of income for the federal government as the current system. Doing that would require eliminating or reining in credits and incentives that will cost Treasury about $102 billion this year. Many business leaders oppose this approach, noting that even after allowing for these “tax expenditures,” U.S. corporations still shoulder a higher effective tax rate — on average about 27% or so, depending on whose numbers you use — than their international competitors. Thus, they argue, a revenue-neutral approach would still leave U.S. companies at a disadvantage.


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