Kyle Pomerleau, for the Washington Examiner
Japan recently announced that it will be lowering its corporate tax rate with further planned cuts over the next five years. While other countries are actively improving their corporate tax code, the United States seems stuck in the discussion phase. Much talk has focused on our burdensome and complex domestic corporate tax code, but Congress would be remiss to gloss over the same problems that exist within our international tax system.
Multinational corporations (those headquartered in the U.S. but with global operations) find themselves burdened with the highest statutory corporate tax rate in the world — a combined state and federal rate of 39.1 percent. In addition, under our worldwide tax system, these corporations must pay taxes regardless of where income was earned — either here or overseas. They are not taxed on the foreign income until they bring it back home. But when they do, in order to avoid double taxation on that overseas income which they’ve already paid to the foreign government, a tax credit is available equal to the foreign taxes paid.
The current international tax rules are complicated and expensive to comply with, and put U.S. companies that operate overseas at a disadvantage in the global marketplace. And as Pamela Olson, U.S. Deputy Tax Leader of PricewaterhouseCoopers, testified recently before the Senate Finance Committee, “Success for America’s globally engaged businesses is essential to the success of their workers as well as the many businesses on which they depend for goods and services.”
When it comes to promoting economic growth that will lead to increased employment and investment in this country, reform of our international tax system is important. As Senate Finance Committee Chairman Orrin Hatch, R-Utah, noted in his opening remarks at the same hearing, “Reforming our international tax system is a critical step on the road toward comprehensive tax reform.”
Other industrialized countries have realized that the global economy has slowly changed over the last few decades and adapted their tax systems accordingly. Of the 34 Organization for Economic Cooperation and Development (OECD) countries, the United States is one of only six which taxes corporations in a worldwide system, whereas thirteen have moved to a territorial system since 2000. Along with Japan, other nations have also implemented reforms to lower their corporate tax rates.
With foreign companies taxed under a territorial system — in which foreign profits are not taxed again when brought to the home country — U.S. multinational corporations operate at an economic disadvantage in the global marketplace.
It is surprising that the administration and some in Congress want to double-down on our current system. They have proposed changes that would place U.S. oil companies at an even greater disadvantage when they operate abroad by taking away their ability to utilize the foreign tax credit. These changes would make the already onerous system under which American companies operate even more difficult and burdensome to navigate.
Not to mention the fact that according to IRS data, the petroleum industry (along with coal products manufacturing) already pays $42.7 billion in foreign taxes on $118.2 billion in taxable income — more than any other sector. Imposing double taxation will only further restrict U.S. energy companies from growing and expanding in the global economy, costing American jobs and revenue.
It’s important to note that it’s not just large multinational corporations with foreign operations being affected by onerous international tax rules. U.S. small and medium-size businesses, which make up 26 percent of multinational corporations according to the Commerce Department, must also try to stay competitive on the global stage under those same rules.
Rather than moving backwards, the United States should look to reform its international tax code. Reducing our corporate income tax rate and enacting a territorial tax system — one that exempts U.S. multinationals’ foreign income from domestic taxation — would bring our tax code more in line with the rest of the world. This will help U.S. corporations be more competitive overseas, which means more money is available to create more jobs and investment here in the United States.
Our current international tax system must catch up to the global marketplace reality. Rather than hinder American companies as they try to stay competitive globally, lawmakers need to sit down together to figure out how we can help American businesses — large and small — succeed both here and across the world.
Kyle Pomerleau is an Economist for the Tax Foundation’s Center for Federal Tax Policy.