Posts Tagged ‘Sales Factor Tax Apportionment’

Sales Factor Tax Apportionment is Better than G-7 Tax Proposal

Tuesday, June 22nd, 2021

For many years, the Organization for Economic Cooperation and Development (OECD) has been coordinating talks among 140 countries on cross-border tax reform in order to get multi-national corporations to pay their fair share of taxes.  Currently, multinational corporations that have subsidiaries or divisions in other countries use legal accounting strategies to reduce their taxes by transferring profits to lower corporate tax rate countries or set up shell corporations in tax haven countries. It’s not fair for multinational firms to sell products in the U.S. market and then pay little or no federal taxes on the resulting profits. Domestic companies bear the brunt of our country’s tax burden, making it more difficult for them to compete in the global marketplace.

On June 5th, the G-7, which is an informal grouping of seven of the world’s advanced countries:  Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, reached an agreement on two pillars of global tax reform.

Pillar One of the agreement “changes allocation of taxing rights. Under the proposal, companies wouldn’t only owe taxes where they’re established and have assets and employees, but would also owe taxes where they have sales.” This new rule would apply to only the world’s 100 largest and most profitable companies.

Pillar Two “imposes a global minimum tax on potentially any company that has a low effective tax rate on foreign earnings. If companies pay lower rates in a particular country, their home countries could “top-up” their taxes on foreign earnings to the minimum rate, removing the benefits of shifting profits. A proposed global minimum tax rate of “at least 15 percent on a country by country basis,” is designed to discourage multinational corporations from shifting profits to low-tax countries. Hopefully, a “worldwide minimum corporate tax rate would reduce the attractiveness of tax havens, which have increasingly become a common part of global business practice in the last three decades.”

“Corporate profit shifting into tax havens by U.S. multinationals has jumped from roughly 5 to 10 percent of gross profits in the 1990s to roughly 25 to 30 percent in 2019, according to a report by the International Monetary Fund. And the use of tax havens costs governments $500 billion to $600 billion per year in lost corporate tax revenue, according to a study cited by the IMF.”

Daniel Bunn, vice president of global projects at the Tax Foundation, told the Epoch Times, “This agreement is subject to further agreements, there’s a lot of work still to be done to ensure that the policy works well. “I’m concerned that if policymakers aren’t careful, they could impact global foreign direct investment flows and hurt business investments globally.”

“It is a whole new way of doing tax policy for multinationals. And one of the reasons I think that Treasury has tried to limit this to the 100 largest companies is because it has the potential to be really, really complex,” Bunn said.

One advantage of the proposed global minimum tax is that it could potentially end the discussion of digital services taxes on big tech companies, more of which are in America than any other country.

One potential problem is whether OECD would be the organization that would designate the top 100 companies in the world. If so, what criteria would they use and how often would the rating be updated, as the ranking could fluctuate from year to year.

Another consideration is what would be the impact of a 15 percent global minimum tax on U.S. companies combined with the substantial tax increases proposed by President Joe Biden that includes a 15 percent minimum tax on large corporations’ book income, as well as increases to the tax rates on both domestic and foreign income.

These two pillars will be the subject of the meeting of the G-20 countries scheduled for later this summer.

On June 8th, the Coalition for a Prosperous America (CPA) issued a statement, saying they “support the Organization for Economic Cooperation and Development’s (OECD) efforts ‘to address the tax challenges arising from globalisation and the digitalisation of the economy and to adopt a global minimum tax.’ This represents a positive step towards eliminating the ability of multinational companies to avoid paying U.S. corporate tax by shifting profits offshore to tax havens.”

“While not perfect, the G7 announcement represents a positive step forward, especially for family companies like mine that pay a higher corporate tax rate than foreign and multinational competitors,” CPA Chair Zach Mottl said. “To truly end the game of multinational profit shifting, the OECD should implement Sales Factor Apportionment.”

“For too long, multinational corporations have used an army of lawyers and tax accountants to offshore production and avoid U.S. corporate taxes,” said Michael Stumo, CEO of CPA. “It is welcome news that the G7 economies are supportive of addressing the harm to domestic producers from multinational profit shifting. However, it is concerning that the G7 announcement would allow the first 10 percent of profits to be exempt, which would allow some profit shifting to still occur. The Biden administration, which called for implementing Sales Factor Apportionment for the top 100 multinational corporations, should urge the G7 economies and the OECD to fully implement a sales-based apportionment system for all companies shifting profits.”

This OECD proposal would be similar but more limited in scope to the Sales Factor Tax Apportionment (SFA) framework supported by the Board of the Directors of Coalition for a Prosperous America since 2017. One of CPA’s members, Bill Parks, a retired finance professor and founder of NRS Inc. was the originator of the SFA framework. Mr. Parks stated “Currently MNEs manipulate loopholes in our tax system to avoid paying U. S. taxes…MNEs can legitimately choose a cost that reduces or increases the profits of its subsidiaries in different countries. Because the United States is a relatively high-tax country, MNEs will choose the costs that minimize profits in the United States and maximize them in what are usually lower-tax countries.” 

Under SFA, the amount of corporate taxes that a multinational company would pay “would be determined solely on the percent of that company’s world-wide sales made to U. S. customers. Foreign MNEs would also be taxed the same way on their U. S. income leveling the playing field between domestic firms and foreign and domestic MNEs.” Thus, if a company generates $1 billion of profit on its U.S. sales, then it should pay corporate taxes on that $1 billion.

On May 18, 2017, CPA submitted written testimony to the House Ways and Means Committee, stating in part, “The US corporate tax system harms America’s trade competitiveness, overtaxes income from wages, under taxes consumption, and is bad at actually collecting what is owed. It also enables rampant base erosion through transferring profits to tax havens or countries with lower corporate tax rates. Full reform centered around destination based, border adjustment principles can result in an efficient, trade competitive, and largely tamper-proof tax system. SFA is a destination-based profit tax. Pretax income is allocated to the US in proportion to the percentage of a company’s total sales in the U. S. Pre-tax income earned outside the US is not taxed. Tax rates can be lowered substantially while still meeting revenue targets…SFA eliminates the disparate tax treatment between domestic companies (who pay the full income tax burden on worldwide income), multinationals (many of which shift profits to tax havens), and foreign companies (which pay a territorial income tax).” 

In September 2020, ”CPA published an analysis of the federal corporate tax paid by the S&P 500 companies in 2019 and found they paid on average less than 9% in cash federal tax last year. The analysis also found that by replacing the current corporate tax system with an SFA system at 21 percent, the United States could have expected to earn an additional $97.8 billion in federal corporate tax receipts for 2019.”

If the OECD doesn’t expand Pillar One into a SFA plan for all multinational companies, not just the top 100, then the U. S. Congress should act unilaterally to establish this plan here. Multinationals should no longer be allowed to employ convoluted profit calculations or reincorporate in a tax haven country as a means to avoid U.S. tax obligations. We need to take bold action if we want to rebuild our American manufacturing industry to create jobs and prosperity.

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Second Day of CPA Conference Focuses on Tax Reform

Tuesday, April 13th, 2021

The second day of the CPA virtual conference held March 23-27th featured two panels: the first on the topic of “Reforming Corporate Taxation to Help Reshore Our Industries,” and the second on ”Buy American.”   In the first panel, the focus was on whether or not additional tax reform is needed by Congress to make sure that tax loopholes that currently favor multinational corporations over domestic companies will be closed.

The Tax Cuts and Jobs Act of 2017 (TCJA) reduced corporate tax rates to a flat tax of 21% from a graduated tax system ranging from a low of 15% to a high of 35%.  At the time, the U. S. had the highest corporate taxes in the world after Japan had reduced their corporate tax rate to 30.86% in 2016, down from a high of 40.69% in 2010.

David Morse, CPA Tax Policy Director, moderated the panel, which began with a tribute to Bill Parks for his work on Sales Factor Apportionment. Mr. Parks is Founder and President, Northwest River Supplies and Founding Director, SalesFactor.org, “which works to advance tax policy that would level the playing field between domestic and multinational corporations, improve U.S. competitiveness in world markets, and foster the long-term health of the American economy.”

Simply stated, Sales Factor Tax Apportionment would tax U. S. and foreign multinational corporations based on their sales in the United States. In other words, the profit a company generates on its U.S. sales would be taxed. These taxes would have to be paid to do business in the U. S.  This would eliminate profit shifting to divisions in other countries or claiming residence in a country with lower or no corporate taxes in order to avoid U.S. tax obligations.

Senator Bill Crapo (R-ID) participated in the panel with a pre-recorded video in which he paid tribute to the work of Bill Parks, whose company is in his state.  He touted TCJA for reducing corporate taxes and stated that it stemmed offshoring of American manufacturing and helped reshoring.  He said that we could strengthen TCJ with legislation on Sales Factor Tax Apportionment.

Representative Bill Pascrell (D-NJ) also participated in the panel with a pre-recorded video.  Rep. Pascrell is on the Ways and Means Committee in the House, and he said that the current tax system is tilted to wealthy and large corporations at the expense of small to medium-sized businesses.  In his opinion, TCJA wasn’t tax reform, and real tax reform is needed.

Ji Prichard, who is Tax Counsel on the House Ways and Means Committee, shared that tax reform is under discussion in the committee.  President Biden’s “Build Back Better” campaign plan had a “carrot and stick” approach to reshore manufacturing – a 10% tax credit for reshoring and a 10% fine for offshoring. 

The third panelist Professor Reuven Avi-Yonah, Irwin I. Cohn Professor of Law and director of the International Tax LL.M. Program at the University of Michigan.  Professor Avi-Yonah has written extensively on the subject of taxes. He supports the Sales Factor Tax Apportionment because he believes that it will solve a major problem in the tax code:  tax avoidance by multinational corporations through profit shifting to offshore entities and reincorporating in tax haven countries. The problem with the OCED tax proposal is that it is only focused on digital transactions that would hurt American high-tech companies. He believes that SFA could be applied unilaterally.

The Buy American Panel was moderated by the Co-Chairs of the CPA Buy American Committee: Greg Owns, CEO, Sherrill Manufacturing and Liberty Tabletop, and Jim Stuber, Founder of Made in America Again and author of What if Things were Made in America Again.

Senator Tammy Baldwin (D-WI) participated in the panel via a pre-recorded video.  She said, “Wisconsin is a state that makes things. We are #1 or #1 in manufacturing of paper, tools, and ships.  It is very important that we produce the things that keep us safe and healthy. When the pandemic started, we saw a shortage of masks, gloves and other PPE. The American Rescue Plan for COVID relief included 10 billion dollars for government purchase of essential goods under the Defense Production Act.” She also said, “The pandemic made it clear that we need country of origin labeling (COOL) for online purchases.  I appreciate CPA’s help in drafting a bill. There are lots of gaps in the Buy American policy for infrastructure. Trade deals have provisions that give foreign companies the right to bid on government procurement. There are 16 countries that can bid as if they are an American company.  But the President can waive these provisions of trade deals in emergency situations.”

Senator Cynthia Lummis (R-WY) participated in a live video, and she said, I support country of origin labeling.  I am a lifelong rancher. We need more domestic products.  Wyoming has rare earth minerals and is an energy producing state.  Buying local and buying American grew in importance during the last year.  I think food security is a national security issue.  You can count on me as an ally on Buy American.”

Representative Claudia Tenney (R-NY) said she is the representative for the district in which Greg Owen’s company is located and also where Revere Copper is located (owned by Brian O’Shaughnessy, CPA’s Vice Chair.) She said that 94% of workers in her district work for small businesses. She also supports Buy American and country of original labeling.

The last panelist was Brad Markell, Executive Director of the AFL-CIO Industrial Labor Council.  He said, “This is the manufacturing arm of the AFL-CIO that includes the presidents of all of the unions in the manufacturing industry. The Trump Administration made great strides on Buy American. The Biden administration left these Executive Orders in place and have added two more E. O.s related to Buy American and supply chain.  Too many government agencies have waivers for Buy American. The manufacturing component of infrastructure is high for construction. Every time the federal government spends money is an opportunity to create jobs.”

The day’s session ended with closing remarks by Bill Bullard, CEO of the Ranchers Cattlemen Action Legal Fund United Stockgrowers of America (R-CALF USA).  He said, “The cattle industry is the single largest segment of U.S. agriculture generating about $65 billion in sales. There are about 729,00 farmers and ranchers in the U.S., down about a half million the past 40 years. Farmers and ranchers are scattered across the country and in nearly every county. Since 1990, we have lost 200,000 cattle ranches and millions of cattle. The U.S. underproduces cattle to supply demand and imports are increasing.  We import beef from 20 countries and about two million live cattle from Canada and Mexico each year. Since NAFTA, the amount of beef we import from Canada and Mexico has tripled, so that we’ve accumulated a $40 billion deficit. Retail prices have risen, especially since 2017, but the rancher’s share of the price has drastically dropped.  This is because there are only four meat packing plants in the U.S. and two are owned by Brazilian companies, so when you have many sellers and few buyers, the price drops.”

Bill’s proposed solution to this problem is country of origin labeling for retail sales that states where the cattle was born, raised, and slaughtered.  Imported beef that is repackaged must also reveal the country from which it is imported. This would be non-discriminatory to all countries. He also stated that “Buy American” policies for federal procurement should require that beef procured for school food programs and the military should fit the criteria of born, raised, and slaughtered in the U. S.  He urged everyone to contact their Congressional Representative and Senator to support country of original labeling for beef.  

We learned a hard less during the COVID pandemic about the dangers of being reliant on foreign countries for our pharmaceuticals and PPE. We must not allow foreign imports of beef and foreign ownership of meat packers to endanger the largest segment of agriculture products. Protecting the safety of our food production is a national security issue.

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How Tax Reform Could Grow our Economy and Create Jobs

Tuesday, September 19th, 2017

Over 150 countries in the world have shifted a significant portion of their tax mix to border adjustable consumption taxes – value added taxes (VATs) or goods and services taxes (GSTs).  Consumption taxes are “border adjustable taxes” and allowed under World Trade Organization rules. Consumption taxes are a tax on consumption – as opposed to income, wealth, property, or wages. Consumption taxes are called goods and services taxes in Canada, Australia, New Zealand or value added taxes in other countries.  They are usually a tax only on the incremental value that is added at each level of the supply chain to a product, material or service. Most countries VATs or GSTs are tariff and subsidy replacements, mimicking a currency devaluation if a country raises the VAT or GST and uses proceeds to lower purely domestic taxes and costs.

After 40 years of multilateral tariff reduction, other countries replaced tariffs with VATs but the U.S. did not. American export­ers face nearly the same border taxes (tariffs + consumption tax) as they did in the early 1970s. Foreign VATs are export subsidies as they are rebated to companies that export their goods. For example:

  • Mexico established a 15% VAT after NAFTA
  • Central American countries established a 12% VAT after CAFTA
  • Germany raised its VAT to 19% in 2007 to fund business tax reduction for trade competitiveness

The rates range from 12% to 24% and average 17% globally. This means that virtually all foreign countries tax our exports at 17% on top of tariffs. They subsidize do­mestic shipments abroad with the average 17% tax rebate. The figure below illustrates how it works.

U.S. Local Price = $100

 

 China Local Price = $100

 
U.S. Price PLUS 17% VAT = $117.00

 

 Chinese Price MINUS 17% VAT rebate = $85.47

 

The map below shows which nations have consumption taxes (red) and which do not (blue).

 

Because foreign consumption taxes are border adjustable, companies that export are double taxed. They pay U. S. taxes and the foreign border tax.  Importers can sell cheaper products because they receive a consumption tax rebate from their home country and do not pay U. S. VAT.

Eliminate Payroll Tax Burden with the most efficient VAT in world

In written testimony to the House Ways and Means Committee of the U. S. House of Representatives on May 18, 2017, the Coalition for a Prosperous America (CPA) recommended “a new border adjustable consumption tax (Goods and Services Tax) that funds a full credit against all payroll taxes.”

Highlights from the testimony paraphrased or quoted include: “A new U.S. goods and services tax (GST) of approximately 12% should be enacted to shift taxation to consumption using the credit/invoice method. The proceeds should be credited against payroll taxes paid by all workers and businesses. GST proceeds should be applied as a full credit against the 15.3% rate of payroll taxes to reduce the cost of labor in the US while increasing after tax wages.

Exported goods and services would receive a full rebate. Imports would pay the GST. Small business with less than, for example, one million dollars could be exempted without sacrificing significant tax revenue.”

CPA’s written testimony explained, “Domestic prices vs. wages would not worsen because the payroll tax is embedded in the cost of all goods and services. Thus, eliminating the payroll tax lowers the prices for goods and services or increases wages depending upon the particular competitive forces in each product sector. A GST raises goods and services prices, but the GST/payroll tax combination would largely cancel each other out thereby holding the domestic economy harmless.

The more modern GSTs implemented by free market economies are in Canada, Australia and New Zealand. The compliance and administration burdens are relatively low in comparison to other taxation methods. The U. S. can learn from those and other countries’ experiences to implement the most modern, streamlined GST in the world.”

In summary, the proposed GST would

  • Reduce the cost of labor in the U. S.
  • Give every worker a raise
  • Lower price of U/ S. exports
  • Levy a tax on imports

The following are some of the benefits of a payroll tax credit for manufacturers, ranchers, and farmers:

  • Regressiveness of VAT offset by elimination of regressive payroll tax
  • VAT costs on all domestic producers are offset
  • No impact on prices of domestic goods/services
  • Imported goods/services prices increase
  • Cost of production for exports reduced

Change to a Sales Factor Apportionment (SFA) Border Adjustable Profit Tax

 Last year, I wrote an article about corporate tax reform at the federal level based on the Sales Factor Apportionment Framework proposed by one of the members of the Coalition for a Prosperous America, Bill Parks. Mr. Parks is a retired finance professor and founder of NRS Inc., an Idaho-based paddle sports accessory maker. He asserted that “Tax reform proposals won’t fix our broken corporate system… [because] they fail to fix the unfairness of domestic companies paying more tax than multinational enterprises in identical circumstances.”

He explained that multinational enterprises (MNEs) can use cost accounting practices to transfer costs and profits within the company to achieve different goals. “Currently MNEs manipulate loopholes in our tax system to avoid paying U. S. taxes… MNEs can legitimately choose a cost that reduces or increases the profits of its subsidiaries in different countries. Because the United States is a relatively high-tax country, MNEs will choose the costs that minimize profits in the United States and maximize them in what are usually lower-tax countries.”

The way his plan would work is that the amount of corporate taxes that a multinational company would pay “would be determined solely on the percent of that company’s world-wide sales made to U. S. customers. Foreign MNEs would also be taxed the same way on their U. S. income leveling the playing field between domestic firms and foreign and domestic MNEs.”.

The Board of the Directors of the Coalition for a Prosperous America chose to support Sales Factor Tax Apportionment and included the following in their testimony to the House Ways and Means Committee:

“The US corporate tax system harms America’s trade competitiveness, overtaxes income from wages, under taxes consumption, and is bad at actually collecting what is owed. It also enables rampant base erosion through transferring profits to tax havens or countries with lower corporate tax rates. Full reform centered around destination based, border adjustment principles can result in an efficient, trade competitive, and largely tamper-proof tax system.

SFA is a destination based profit tax. Pretax income is allocated to the US in proportion to the percentage of a company’s total sales in the U. S. Pre-tax income earned outside the US is not taxed. Tax rates can be lowered substantially while still meeting revenue targets.”

The Coalition for a Prosperous America favors “a border adjustable business tax (for all entity types) which allocates pre-tax income based upon the destination of sales. Formulary apportionment based upon a single sales factor (sales factor apportionment or SFA) is well established at the state level. It solves most of the base erosion/profit shifting and tax haven abuse problems facing tax writing committees. SFA eliminates the disparate tax treatment between domestic companies (who pay the full income tax burden on worldwide income), multinationals (many of which shift profits to tax havens), and foreign companies (which pay a territorial income tax).

A broad based 12% GST could raise $1.4 trillion in new revenue. Payroll tax revenue in 2015 was 33% of total tax revenue at $1.056 trillion.”

CPA asserts that U. S. “trade competitiveness would be substantially improved because exports are freed from both the GST and payroll tax burden. Imports never include the cost of the U. S. payroll tax, but would pay the GST. This effect has been called Fiscal Devaluation because it mimics a currency devaluation for trade purposes. It only works if you combine a new GST with a ubiquitous domestic tax or cost reduction. The optimal domestic tax reduction is the payroll tax burden.”

The reason for CPA’s support is that “SFA taxes pre-tax income allocated to the U. S. but not profits allocated to foreign sales.  Domestic firms can legitimately ‘avoid’ taxation by exporting more. Profits from imports are subject to tax. Domestic, multinational and foreign firms are on an equal tax footing.

The current corporate tax system cannot be fixed because it allows the fiction of intra-firm transactions to erode the tax base.  Multinational companies use them to self-deal, strictly for tax purposes, shifting income to tax haven jurisdictions.  Companies sell products or services to themselves, governed only by an ‘arm’s length’ principle which allows them to create their own pricing terms subject to a nearly unenforceable ‘fair market value’ constraint.

The intra-company transactions are not free market, ‘arm’s length’ or true third-party transactions. The only economically meaningful ‘sale’ is one to a true third party outside the company.  As much of 30% of tax revenue may be lost from profit shifting to tax haven jurisdictions which have effective tax rates of 0-4%. These include Bermuda, Netherlands, UK Caribbean Islands, Ireland, Luxembourg, Singapore, and Switzerland.”

The CPA testimony provides the following example: “Assume a multinational corporation has worldwide sales of $100 billion, $50 billion sales in the U. S. and company-wide pretax income of $10 billion. Fifty percent of the profits, under SFA, are apportioned to the US.  So, the profits to be taxed in the USA in this case are $5 Billion.  Using a 20% corporate tax rate yields a SFA tax of $1 billion. Intra-company transactions with a Bermuda subsidiary would be irrelevant.

Merely lowering the U. S. corporate tax rate for example to 15% without further reform would not eliminate the tax competition with tax haven jurisdictions. SFA would make tax havens irrelevant because true sales to any foreign country would be ignored.  IRS litigation centered around the proper fair market value of intra-firm transactions would disappear. Only profits allocated to the US in proportion to true third-party sales would be taxable.”

CPA asserts that “SFA would allow a significant reduction in the business tax rate while collecting similar revenue because base erosion is largely fixed. By one estimate, a 13% corporate tax rate under SFA would collect the same revenue as the current system…”

In conclusion, CPA recommends, “The U. S. tax system should shift to more border adjustability through destination based taxation. If the House GOP Blueprint does not gain Senate or White House support, the Ways and Means Committee has solid alternatives to meet their goals. CPA supports enacting (1) a new GST to fund a full credit against payroll taxes, plus (2) a shift to sales factor apportionment of global profits as an alternative to our current corporate income tax system.”

We need to take bold action if we want to rebuild our manufacturing industry to create jobs and prosperity. As I visit district offices of our California Congressional delegation as chair of the California chapter of CPA, I am encouraged by the interest these recommendations for tax reform are generating on a bi-partisan basis.

 

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