Even though international agreements have been reached on combating tax avoidance through the OECD/G20 base erosion profit shifting (BEPS) plan initiative, it does not necessarily follow that US multinational corporations will bear increased tax on their foreign operations in the future, the staff of the US Joint Committee on Taxation (JCT) has concluded in a paper released November 30.
The paper, Background, Summary, And Implications Of The OECD/G20 Base Erosion And Profit Shifting Project, was prepared by the JCT staff to provide background information for hearings to be held tomorrow by the House Ways and Means Committee Subcommittee on Tax Policy and the US Senate Finance Committee.
According to the report, while it is possible that US multinational companies will face increased taxation on foreign income as foreign governments clamp down on MNE profit shifting to low-tax or zero-tax countries, it is also just as possible that US multinationals’ tax burden will decrease because foreign governments may decide to adopt tax incentives, such as preferential tax rates on intellectual property, to encourage investment.
“The BEPS Project documents explicitly avoid suggesting any desired level of statutory corporate tax rates and explicitly contemplate that countries around the world may compete for economic activity by lowering statutory tax rates and by creating special tax preferences for targeted activities such as expenditures on research,” the report states.
The report notes that for groups having a US parent with over USD 500 million in assets, the average tax rates of US controlled foreign corporations declined from 26.0 percent in 1998 to 10.6 percent in 2012. This could be due to decline in tax rates or from companies reporting more earnings in low-tax jurisdictions, possibly from profit shifting, the report states.
The JCT staff also attempted to provide data addressing US policymakers’ concern that foreign-controlled US companies have a competitive advantage because the group can engage in earnings stripping to lower their US tax rate. The JCT staff said it can not be concluded from the data that foreign-controlled US corporations have either a higher or lower tax rate than domestic corporations that are controlled by US MNEs or than purely domestic corporations. Also, during six of the nine years from 2006 to 2014, there were more acquisitions involving a US acquirer than a US target, the JCT staff noted.
The paper also provides an overview of each of the BEPS plan action items and outcomes.
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