Corporate Tax

Abstract

Although United States is one of the highest corporate tax rates in the world, companies have been increasingly using a maze of shelters, tax credits and subsidies to pay less corporate taxes. Many American corporations pay little to no corporate taxes because they are able to take advantage of the tax "loopholes". These “loopholes” make it possible for corporations to shift profits from high-tax states to low-tax states. The current U.S. tax system actually encourages U.S. multinationals to relocate assets and economic activity, and earn and realize profit in other countries where taxes are lower.

There is a declining trend for the corporate effective tax rate over the past decade. Microsoft, General Electric, and Cisco now earn more than half of their profits outside the United States. These companies and others like them in the United States simply apply ‘defer tax credits’ as a strategy to avoid paying large sums of money. The foreign tax credit enables U.S. corporations to defer foreign tax profits until they are earned. Therefore, the job of corporate tax departments is no longer to merely comply with tax laws but to contribute to the bottom line and make more money.

The other issue for current corporate taxation is combined reporting. Many states allow profits to be attributed to out-of-state subsidiaries even when those subsidiaries are closely associated with in-state business. This loophole makes it possible for corporations to shift profits from high-tax states to low-tax states. The combination of low foreign tax rates and the ability to defer taxes on foreign profits creates a significant tax incentive for U.S. corporations to move production and jobs to low-tax countries. This wills in turn led to less money flowing back into the U.S. domestic investments, job creations, and overall economic growth.

Overview

It is generally agreed that U.S. rules for multinational taxation are more complicated than the rules of other countries....