international tax reform prepared for siepr-tpc tax reform conference rosanne altshuler january 18,...
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International Tax Reform
Prepared for SIEPR-TPC Tax Reform Conference
Rosanne AltshulerJanuary 18, 2013
The Current System
35%
The Current System
Lowland
15%
35%
The Current System
35%
15%
A U.S. corporation sets up an affiliate In Lowland…
The Current System
… earns $100and pays $15 in tax
to Lowland
35%
15%
Worldwide taxation with credit
Owes $35 to U.S. ─ $15 credit for taxes
paid to Lowland= $20 residual tax to U.S.
35%
15%
$100
Worldwide taxation with credit
earns $100 in Highland and pays$55 in taxes
35%
55%
Worldwide taxation with credit
$10035%
55%
Owe $35 to U.S. ─ $35 credit for taxes paid to Highland
= $0 residual tax and $20 of “excess credits”
Worldwide taxation with credit
15%
Earns $100
Earns $100
35%
55%
Worldwide taxation with credit
15%35%
55%Use $20 of “excess credits” from Highland to offset
$20 owed on income from Lowland= $0 residual tax
$100
$100
When is Tax on Foreign Earnings Paid?
Owe $20 residual tax to U.S. on earnings in Lowland ONLY when the $100
is repatriated
$10035%
15%
The current worldwide credit and deferral system creates many avenues for sophisticated tax planning
It’s complicated…
Transfer of intellectualproperty Royalties
License
Royalties
Sub license
RoyaltiesSublicense
Overseasbuyers
Even Dilbert does Google’s Double Irish with a Dutch Sandwich
Discontent with the current system has focused policy makers and analysts on possible reforms…
How do Territorial Systems work?
$10035%
15%
No tax owed to U.S. on the active income earned in Lowland
Territorial taxation through dividend exemption (royalty payments made to parent would be taxed)
List of OECD countries
Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovenia, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States
Territorial Tax Systems
Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovenia, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States
Worldwide Tax Systems
Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovenia, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
20
25
30
35
40
45
50
Top Combined Statutory Corporate Tax Rates since 1986
United States
OECD average excluding U.S.
Combines central and sub-government taxes. Source: OECD tax database.
Problems with current system
• Income shifting and its effects on investment location decisions and revenue
• Lockout effect of repatriation tax and associated costs of avoidance
• Complexity• May put U.S. multinationals at a competitive
disadvantage• Raises little revenue
(Some) Possible Reforms
• Fundamental reforms– Worldwide taxation with repeal of deferral– Dividend exemption • Grubert and Altshuler (2012): combine dividend
exemption with a minimum tax of 15%
– Formulary apportionment
(Some) Possible Reforms
• Incremental reforms– Lower the statutory rate– Repeal check the box– Administration budget proposals and other
reforms of current law
Evaluating the Reforms
• Key considerations– Repatriation tax?– Income shifting incentives?– Tax revenue? – Simplicity?– Location incentives for tangible and intangible capital?– Expatriation incentives?– Transition rules?
Effective Tax Rate Simulations*
• Home country (U.S.) with tax rate of 30%• Low tax country (5% tax rate), high tax country
(25% tax rate), tax haven (0% tax rate)• A discrete high tech investment in low tax
country based on U.S. R&D• A routine investment in high tax location• Income shifting possible but is not costless
*From Grubert and Altshuler, 2012, “Fixing the System: An Analysis of Alternative Proposals for the Reform of International Tax”
Effective Tax Rate Simulations*Investment in
low tax country
(5% tax rate)
Investment in high tax country
(25% tax rate)Current law with 30% rate -23.6% 13.0%Current law, 30% rate, repeal of deferral 30.0% 30.0%Current law, 30% rate, repeal of check the box
-18.2% 24.2%
Dividend exemption -29.5% 10.7%Dividend exemption with minimum tax of 15%
5.6% 12.1%
*From Grubert and Altshuler, 2012, “Fixing the System: An Analysis of Alternative Proposals for the Reform of International Tax”. Assumes check the box remains in place unless noted.
Conclusions
• Look for reforms that make improvements to the current system across many dimensions including lockout effect, income shifting, competitiveness, and complexity
• Goals may not be in conflict– A minimum tax combined with dividend
exemption may have advantages over repeal of deferral and dividend exemption alone, and reduce their shortcomings