Beware BEPS!
The acronym BEPS stands for “Base Erosion and Profit Shifting” and the BEPS project is an effort by the OECD to study perceived flaws in international tax rules. The perception that multinational corporations were avoiding taxes of some countries by using these flaws was the main motivation for the ongoing study. The Group of 20 Nations (the G20) meanwhile has taken this study as a reason for increasing and tightening taxes on multinationals. Not surprisingly, the Obama administration has endorsed the BEPS project with the belief the American tax base would be buttressed and Washington would able to capture more corporate taxes from multinationals.
The New York Times, however, reports that the way the new tax rules were written, the damage done to the U.S, will be due to a lot more than just capturing more taxes from multinationals. Taking more assets away from corporations so that they cannot invest those assets in the economy is bad enough as it is. This is especially true in our fragile, low growth economy (see here and here and here). That damage caused by BEPS is only the beginning. According to the New York Times, the BEPS rules would force corporations to pay taxes according to the location where their income was earned. This makes sense given the general world-wide practice of taxing corporate income only in the countries where it is earned. Nevertheless, no matter how much sense it makes, the details of the BEPS “reforms” are very disadvantageous to the United States.
Most European countries have considerably lower corporate taxes than the U.S., with even larger tax breaks if a company creates intellectual property (IP) in one of those countries. In the past, American multinationals could take advantage of those lower taxes by moving their IP from the U.S. to one of those countries. Then the workers who actually created the property – the scientists, managers, and engineers – and their wages would remain in the U.S. The way the new rules are written, however, companies could continue enjoying the low taxes only if they could actually prove the value of the intellectual property was really created in the European country. To do that the multinationals would have to transfer the workers creating the IP to the European country. As a result the U.S. would lose all those highly skilled people and their wages.
The tax differences are so large we could expect U.S. company transfers of people and assets to become a flood. Taking Great Britain as an example, the New York Times notes Britain has a national corporate tax rate of 20 percent compared to the U.S. marginal rate of 35 percent. Britain then offers a further drop to an effective tax rate of 10 percent through a tax regime called an IP-box. A corporate tax rate of 10 percent versus 35 percent should have corporations racing to get out of the U.S. and into Britain. The New York Times reports that American multinationals are already having internal discussions about such a move, with the deluge possibly beginning at the end of the year.
What can we do to forestall this disaster? At this late moment in time, about the only thing that can be done would be to lower our corporate tax rates to internationally competitive levels. Â Given the anti-corporate philosophy of the Obama administration, I would not hold my breath.
Views: 2,506