Defending deferral
National Public Radio’s Marketplace This Morning recently ran a piece on its show highlighting an in-depth investigation by the Center for Investigative Reporting that focused on the ability of U.S.-based companies to legally evade paying taxes on the profits earned from their overseas operations.
The story presented a picture of U.S. corporate behavior that no doubt left many people indignant both over the porous nature of the tax code as well as the perfidy of the U.S. corporations that, it alleges, are exploiting loopholes to deny the U.S. government much-needed revenue.
The sheer outrage that the story’s attempting to generate raises a question: is there another side to this? Since the Center for Investigative Reporting alleged that it couldn’t find anyone willing to go on the record to defend the ability of U.S. corporations to defer the payment of taxes on foreign-earned income, allow me to do so.
The United States is the only country in the 33-nation OECD that requires companies to pay taxes on income earned abroad. The other countries exempt this income for a simple reason: it allows their companies to be more competitive abroad, and that is ultimately a good thing for their country and the companies headquartered in their country.
A U.S. company operating in France does pay corporate income taxes to France on its income earned there—something the report inexplicably failed to mention. U.S. companies that do not defer bringing that income back to America must then pay U.S. taxes on top of the taxes paid to France. This means that U.S. companies operating in France pays an effective tax rate of nearly 40 percent (the highest in the OECD) while a company from nearly every other country pays the French tax rate of only 25 percent on those profits.
As a result, the U.S. company finds it more difficult to compete in this market, and its overseas operations will be smaller—as well as its U.S. operations, as it will need fewer support staff in IT, logistics, marketing, and management to support its smaller overseas operations. Allowing U.S. companies to defer paying U.S. taxes until they are repatriated allows them to narrow the tax gap between them and their competitors.
Sen. Carl Levin, D-Mich., whose report was mentioned, alleges that if U.S. corporations do not face the same (high) U.S. tax rate on their foreign and domestic operations then they will move domestic operations overseas to take advantage of lower tax rates, but there’s little evidence of that occurring. However, there is a great deal of evidence that companies that locate operations abroad usually do so in order to service local markets by producing low-margin goods close to where they are being sold. Without deferral, Pepsi is not going to produce soda and chips in the United States and ship them across the ocean to Poland: they’re more likely going to divest their Polish operations. How does that help the United States?
How we tax U.S. corporations abroad is a complicated and contentious topic that’s currently at the heart of attempts to reform the U.S. tax code. To present deferral as merely some kind of tax scam that U.S. tech companies are pulling on the Treasury while not offering any sort of rebuttal amounts to agitprop.
