Group of Leading U.S. Companies Strongly Urge Against Proposed 19% “U.S. Headquarters Tax”

Group of Leading U.S. Companies Strongly Urge Against Proposed 19% “U.S. Headquarters Tax”

On April 15, 2015, the Alliance for Competitive Taxation (“ACT”) submitted its comments to the Senate Finance Committee’s Bipartisan Working Group on International Taxation in response to the Committee’s request for input on bipartisan tax reform. In the letter, the ACT presented its position against a new 19% foreign minimum tax proposed in the Obama Administration’s FY 2016 Budget, calling it an effective “U.S. headquarters tax” (“USHQT”) that will put U.S. multinational companies at a competitive disadvantage.
ACT describes itself as a group of American businesses that support comprehensive United States tax reform and the establishment of a modern globally competitive tax system that aligns the U.S. with the rest of the world. The group includes some of America’s largest U.S.-based multinational corporations such as Wal-Mart, Google, Verizon and General Electric.

BACKGROUND ON THE 19% FOREIGN MINIMUM TAX

In its FY 2016 Budget, the Obama Administration proposed a new 19% foreign minimum tax that would be imposed on the foreign income of U.S. corporations and their controlled foreign corporations (“CFCs”). The tax would apply on a per-country basis, and would equal the excess of 19% over 85% of the average foreign effective tax rate (“ETR”).

The average foreign ETR would be determined for each country based on foreign earnings and foreign income taxes over a 60-month period. The base of the foreign minimum tax would include the foreign earnings allocated to each country in which the U.S. CFCs operate, reduced for certain allowances and exceptions. The income of CFCs not currently taxed by the new minimum tax or under Subpart F would be entirely exempt from U.S. tax, and no foreign tax credits would be allowed with respect to this income. As a result, no tax would be collected on repatriated CFC income. The current earnings of foreign subsidiaries would, however, be immediately subject to U.S. taxation.

ISSUES RAISED BY THE ACT

In its assessment of the USHQT, the ACT referenced a report issued by the Senate Finance Committee in December 2014 on comprehensive U.S. tax reform. The report outlined the following seven principles needed to guide comprehensive tax reform: economic growth, fairness, simplicity, permanence, competitiveness, promotion of savings and investment and revenue neutrality. The ACT went on to explain why it believes that the USHQT would impede the progress toward achieving each of these goals, from the complexity of complying with the proposed tax to the competitive disadvantages the group believes the new tax would create for U.S.-based corporations.

1. 1. Economic Growth. The ACT believes that the U.S. already imposes substantially larger tax burdens on foreign subsidiary income than other countries. The group feels the new tax essentially amounts to a tax penalty for American ownership of foreign assets, making it more difficult for U.S. employers to compete abroad, with market forces eventually shifting the ownership of foreign assets to foreign-based companies.

1. 1. Fairness. The OECD member countries are currently reviewing international standards for taxing cross-border income, proposing changes in the OECD model treaty and transfer pricing guidelines, and recommending the best practices for national tax systems. One objective of this project is to achieve multilateral agreement on the principles for taxing cross-border income, preventing issues that would result from uncoordinated unilateral actions taken by individual countries. The ACT believes that the proposed USHQT is exactly the type of unilateral action that the OECD aims to prevent.

1. 1. Simplicity. The U.S. tax laws are already voluminous at over 70,000 pages in length and have gone without substantial reform in nearly 30 years. Rather than simplifying the already complex tax system, the ACT urged that the USHQT would not only add massive complexity to the law, but would place a substantial compliance burden on multinational U.S. employers as well as U.S. tax practitioners.

1. 1. Permanence. The ACT believes the proposed USHQT would further the gap between the U.S. corporate tax system and international norms, and that the proposed system would not withstand the test of time with U.S. and foreign-based companies aggressively competing around the world.

1. 1. Competitiveness. Citing the recent trend that OECD and G-7 member countries are adopting territorial tax systems, the ACT believes the U.S. is already at a competitive disadvantage globally. The group feels that the USHQT would further place U.S. companies at a disadvantage with an additional tax on their foreign income, rather than promote international competitiveness. Some of the supporting data the group cited includes:
      • Within the OECD, 93% of the non-U.S. parented companies on the Fortune 500 list in 2012 were located in countries that use territorial tax systems.
      • In each of the last 10 years, foreign acquisitions of U.S. companies have exceeded U.S. acquisitions of foreign companies as measured by transaction value.
      • The number of U.S. companies in the Forbes Global Top 500 list dropped from 200 in 1998 to 135 in 2013.

1. 1. Savings and Investment. According to the ACT, if the U.S. attempts to impose significant taxes on foreign subsidiary income, U.S. investors will continue to invest in foreign headquartered companies as part of their investment portfolios, since the earnings of those companies are not subject to U.S. tax on their foreign income. The ACT argues that, as a result, a larger share of assets will be managed by foreign firms. Alternatively, a desired increase in U.S. investment from foreign sources is unlikely to occur. For these reasons, tax policy should focus on making the U.S. an attractive investment location for both U.S. and foreign investors.

1. Revenue Neutrality. One of the chief objectives of the comprehensive tax reform outlined in the Senate Finance Committee’s report is revenue neutrality; that an increase or decrease to the tax rate structure would be offset by an increase or decrease to tax preferences and incentives elsewhere. While the ACT supports revenue-neutral tax reform, it believes paying for this reform with the USHQT would be “self-defeating,” leaving multinational U.S. employers at a competitive disadvantage and shifting much of the additional tax revenue to foreign governments.

At a time when many advanced economies are attracting innovative companies with tax regimes offering reduced rates for patent and other intellectual property income, the ACT believes that, with the proposed USHQT, the U.S. intends to penalize companies for locating their business in lower-tax foreign jurisdictions. Rather than enticing U.S. companies to commit to U.S. growth and investment, the USHQT may either incentivize these companies to locate their headquarters abroad or make them more susceptible to foreign acquisitions.

Click here for the submission of comments by the ACT to the Senate Finance Committee’s Bipartisan Working Group on International Taxation.