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View Diary: Four easy fixes for corporate taxation (22 comments)

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  •  Headquarters Location Is Not the Issue (0+ / 0-)

    Nearly every part of the quote below is incorrect.

    All you're doing by that... (0+ / 0-)
    ...is guaranteeing that there's a significant tax disadvantage by being headquartered in the United States.  It also puts us at odds with the rest of the world as we pry into their business to tax subsidiaries that employ and operate in their countries.
    A corporate income tax calculated under unitary formula apportionment does not vary to any significant degree due to headquarters location.The tax varies under the unitary with the location of sales, property and payroll in total. Headquarters property and payroll is typically too small to have any real effect on the final tax. The U.S. tax would basically be the same for a multinational corporation regardless of whether its headquarters were in New York, Tokyo, London, Singapore, Frankfurt or anywhere else. So the tax would not affect headquarters location.

    The unitary approach is more neutral than the current arms length system that provides incentives for U.S corporations to shift production overseas, overstate the profits in those foreign locations, and benefit from deferred taxation on those profits. The current system creates huge incentives for off-shoring production. With a unitary approach, the incentives for off-shoring will decrease.

    As to prying into the business of subsidiaries abroad, the current arms length system is many times more intrusive than the unitary system. An arms length tax audit goes to the details of whether specific inter-company transactions (an enormous volume) are made at the "correct" transfer prices (impossible to determine in reality). The current system digs into the business of overseas subsidiaries much, much more than a unitary tax audit, which is considerably simpler and deals with aggregate financial data and general operational characteristics. In fact, greater simplicity as compared to the arm's length approach is a virtue of the unitary system.

    As to being at odds with the rest of the world, the U.S. convinced the rest of the world to use the arms length approach. If the U.S. moved in the direction of unitary formula apportionment, other major nations will likely be happy to junk the failed arms length approach.

    Yes, well, I'm not saying such an approach is illegal, just ill advised.
    The U.S. Supreme Court decided (in a series of three cases) that the use by state governments of the unitary approach was constitutional precisely because it was fair and equitable to interstate and foreign commerce, i.e. well-advised. In this instance, sticking with the Supreme Court's judgment on what is well-advised is the better course.
    The solution is not to cling to an increasingly obsolete form of tax (corporate income tax) and instead move to other forms of taxation.
    If someone is proposing an entirely different form of taxation, then the person should describe the proposal in terms sufficient for others to evaluate it. Saying there is something better, but not explaining what that tax is, does not advance the discussion.
    •  I really don't understand how unitary taxation (0+ / 0-)

      would work.

      The most common factors to put in the formula are sales, employment, and assets.
      Let's say that a US company is owned 50/50 by CITIC Group (a Chinese state owned investment company) via its CITIC Capital PE subsidiary and by ADIA (Abu Dhabi's sovereign wealth fund).

      Are you saying that this company's tax should be somehow calculated based on the total sales, employment, etc of CITIC Group and ADIA, including that of their various subsidiaries and wholly owned companies?

      CITIC is huge - and big chunks of its activities are considered state secrets by the government of China.  (In fact, detailed accounts info of all SOEs in China is considered state secrets.)  I wonder how you are going to get that information to compute tax.  Or are you going to ban Chinese SOE investment in the US?  (Better think carefully - for example, Beijing Automotive Investment Corp bought a bunch of Delphi's factories out of the bankruptcy, including some in the US.  BAIC might welcome an excuse to shut them down without losing face.)

      ADIA is equally opaque.  Its estimated AUM is $627 billion.  It owns companies and real estate all over the world, with an emphasis on the Arab and Muslim worlds, but also plenty of stuff in the US and Europe.  I am working on a relationship with a company that is half owned by a company that is fully owned by ADIA.  That third level subsidiary itself owns dozens of companies in garden spots like Libya, Sudan, and Somalia, some of which are holding companies owning multiple companies beneath them.  They follow Islamic banking rules and their investees report their financials based on the requirements of their local governments, which often bear little resemblance to GAAP.

      Even with the best will in the world, do you think that the hypothetical company I just described would be able to produce a tax return under your system?  If it did, how many gigabytes do you think it would be?  And do you really think it would bear much relation to reality?

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