An earlier version of this article was posted in ITEP’s Just Taxes Blog.
Last Thursday, Representative Lloyd Doggett and Senator Sheldon Whitehouse announced that they are reintroducing the “No Tax Breaks for Outsourcing Act.” Our international corporate tax rules have been a mess for a long time, and the Tax Cuts and Jobs Act (TCJA) failed to resolve the problems. The old rules and the new rules under TCJA both tax offshore corporate profits more lightly than domestic corporate profits, but in different ways. The No Tax Breaks for Outsourcing Act would create rules that tax domestic profits and foreign profits in the same way.
The old rules allowed American corporations to defer paying taxes on their offshore profits until those profits were officially brought to the U.S., which in many cases was never going to happen. The new rules, under TCJA, are also problematic because they exempt certain offshore profits and tax other offshore profits at just half the rate imposed on domestic profits.
Either way, taxing offshore profits more lightly than domestic profits encourages corporations to engage in accounting gimmicks to make their domestic profits appear to be earned in tax havens, countries where they are taxed very little or not at all. Even worse, these rules could encourage companies to shift actual operations and jobs offshore.
Under TJCA, the U.S. taxes the offshore profits of an American corporation only to the extent that those profits exceed 10 percent of the tangible assets that the corporation has invested offshore. Tangible assets are things like factory machines and office buildings, and actual jobs tend to be located wherever they are. This rule means many offshore profits are not taxed, and it could encourage companies to shift more tangible assets, and the jobs that go with them, to other countries in order to reduce their U.S. tax bill. Even the offshore profits that are subject U.S. taxes get a massive break under TCJA because they are taxed at only half the rate that is imposed on domestic profits.
The legislation introduced by Rep. Doggett and Sen. Whitehouse would do away with these breaks. All offshore profits would be subject to the same 21 percent corporate tax rate that is imposed on domestic corporate profits.
Corporations would still be allowed a tax credit for any foreign taxes they pay (as they are under current law) to prevent double-taxation. The new version of this legislation even makes the foreign tax credit a little more generous by doing away with a TCJA provision that limits foreign tax credits to just 80 percent of foreign taxes paid.
In addition, this bill would strengthen the definition of a foreign corporation by closing the corporate inversion loophole, in which a company claims to become a foreign entity through mergers or acquisitions. The bill would require that the resulting entity be treated as a U.S. corporation if it is controlled in the United States or if a majority the shareholders have not changed. The legislation would also eliminate some breaks for oil and gas companies and make it more difficult for foreign corporations to strip earnings from their U.S. subsidiaries by manipulating debt.
The No Tax Breaks for Outsourcing Act was reintroduced with the Stop Tax Haven Abuse Act, which requires companies to disclose their country-by-country revenue and employee count in the public disclosures they submit to the Securities and Exchange Commission. This pair of bills is reintroduced at a time when the OECD and IMF have announced a comprehensive review of international taxation to prevent tax base erosion and profit shifting by multinational corporations.
Lorena Roque is a Research Assistant at the Institute on Taxation and Economic Policy.