Top Republican lawmakers are uneasy with new international plans to curb corporate tax avoidance, but they may not have many options to prevent the crackdown.
Rep. Paul Ryan, chairman of the tax-writing House Ways and Means Committee, warned Monday that the rules introduced earlier in the day by the Organization for Economic Cooperation and Development “will only increase the pressure for American businesses to move overseas” and “could put huge new burdens on American job creators.”
The group of about three dozen developed nations announced a raft of new rules for its member countries to prevent multinationals from shifting income between subsidiaries to take advantage of tax havens.
The Organization for Economic Cooperation and Development reckons that such “base erosion and profit shifting” costs governments $100 billion to $240 billion each year, or up to 10 percent of corporate tax revenue.
Republicans agree about the magnitude of the problem, but they argue that the response should be tax competition, not new coordination of rules. With a tax reform that lowered U.S. corporate tax rates or ended the taxation of American companies on their overseas income, they claim, punitive measures would not be needed.
Sen. Orrin Hatch, chairman of the Senate Finance Committee, said he would need time to examine the proposals. But he also expressed a preference for tax reform rather than new rules.
“While international efforts to align tax systems are worth exploring, implementing competitive tax policies to maximize our national well-being should be our number one priority,” the Utah Republican said.
The Organization for Economic Cooperation and Development project, which has been two years in the making, has been a major impetus for Republicans to push for corporate tax reform, even though many members of the caucus are wary of a reform effort that does not include lowering individual rates.
Some Republicans fear that the global rules could significantly worsen the current trend of U.S. companies moving their headquarters overseas through foreign takeovers or “inversions,” which are maneuvers in which U.S. businesses merge with companies in low-tax jurisdictions and then place the headquarters of the combined company in that country.
Currently, in such tax maneuvers, the companies shift profits on paper, but won’t generally move actual jobs or facilities. For example, companies such as Apple will engage in complicated legal schemes in which intellectual property income is routed through Ireland even though most of its workers are in California.
The rules, however, would push companies to declare profits in the place where the workers and resources are located. Republicans fear that, because of America’s high corporate tax rates, companies will respond to the new rules by moving jobs and resources, rather than shifting income back to the U.S.
U.S. companies “will be disproportionately impacted” by the rules, former House Ways and Means Chairman Dave Camp, a Michigan Republican, warned this summer at an event hosted by the U.S. Council for International Business. Camp referred to the U.S. taxing corporate income at a statutory rate of 35 percent, the highest among advanced economies, and taxing companies on their income earned overseas, also unusual for rich countries.
“Ultimately, the solution is to bring our tax code into the 21st century, allowing companies to bring back their earnings without penalty and making our tax rates more competitive with the rest of the world,” Ryan said. “There is never going to be a perfect time to fix the tax code, but stalling for so long got us into this problem. We can’t afford to wait any longer.”
Yet Ryan’s push for corporate tax reform has seen limited success in Congress, and the window of opportunity is closing as the campaign season begins and President Obama’s administration winds down.
Ryan has been negotiating with Democratic Sen. Chuck Schumer of New York on a plan to marry international tax reform with funding for infrastructure through a repatriation of the roughly $2 trillion in untaxed profits currently held by U.S. companies overseas. But a Ryan aide acknowledged Friday to Politico that it was “unclear” whether even such a limited deal was possible.
Ryan and Hatch also have been frustrated in their attempts to get responses from the Treasury about implementing one of the international organization’s proposed actions, namely new minimum standards for corporations to disclose their country-by-country income for the purposes of limiting profit shifting. The Republicans have questioned whether the Treasury has authority to require that information, and have raised concerns that it could lead to sensitive information falling into the wrong hands.
The Treasury did not respond to an inquiry about whether Treasury Secretary Jack Lew responded to the letter sent by Ryan and Hatch in August.
