by Patriotic Millionaires | Updated on 5.17.18
What is a territorial tax system? American corporations - just like American people - used to pay taxes on all income earned, wherever they earned it. Before the GOP tax bill, corporations had to pay the 35% corporate rate on profits earned abroad, minus a credit for foreign taxes actually paid. But the GOP tax bill adopted a modified territorial tax system, in which corporations pay only a 10.5% percent tax on foreign profits, minus a percentage of foreign taxes paid on those profits. This means companies will now almost never pay US taxes on profits they book offshore. And without stricter laws, multinational corporations will continue to be able to book most of their profits in offshore affiliates.
Who benefits from the switch to a territorial tax system? This switch means that large international corporations will pay a lot less in taxes here in the United States, leaving the rest of us to pick up the tab for running the country.
This switch is a huge break for multinational corporations - not only because it means they will now pay virtually no taxes on their foreign profits, but also because it helps them use loopholes to avoid paying taxes on US profits as well. Major corporations like Apple and GE are able to divide themselves up into multiple businesses, register those businesses in tax havens like Ireland (where the corporate tax is only 12.5%), and then manipulate their books to say most or all of their profits are in those countries.
For example, Apple might establish an affiliate in Ireland and sell the logo or patent for the iPhone to the Irish version of Apple, which then charges fees to US Apple for the use of the logo or patent. For every iPhone bought in the US, Irish Apple charges those fees to US Apple, meaning US Apple makes no money on that sale while Irish Apple makes all the profits. Under the newly minted territorial tax system, that means Apple will now never have to pay any US tax on those profits.
This tax system not only gives corporations a huge incentive to game the system and avoid paying their fair share, it hurts small businesses, who will now have to compete with massive corporations paying no taxes on their products. It also encourages corporations to relocate their plants to other countries in order to take advantage of the preferential treatment on foreign income, potentially leading to massive amounts of American manufacturing jobs being lost.
What should we do about a territorial tax system? We should not follow the failure of other countries that have tried a territorial tax system and are now going broke. We need to get rid of the territorial tax system imposed by the GOP tax bill, close the loopholes that allow profits to be shifted offshore, and ensure multinational corporations pay their fair share in taxes.
Written by Patriotic Millionaires
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