Senate Finance Committee Chairman Max
Baucus (D - Mont.) has expressed dismay at the findings of a
report by the Government Accountability Office (GAO), which show
that US multinational companies are increasingly reporting income
offshore to cut their tax bills.The GAO report, published on
Monday, found that the number of foreign operations of US
companies is increasing, with the largest companies paying the
lowest effective tax rates, and more income being reported in
lower tax rate jurisdictions outside the US.
However, what has provoked the ire of Baucus and his Republican
counterpart on the committee, Chuck Grassley, is the report's
conclusion that businesses may be manipulating existing tax laws
by shifting corporate income and tax planning to foreign tax rate
jurisdictions in which they operate.
“I’ve said before that we will tackle tax reform in 2009 and
this report underscores the need to review business taxes as part
of our tax reform efforts in the next Congress,” said Baucus
“Simply put, I do not intend to allow US multinationals to
sidestep their fair share of taxes by moving income offshore.
Rather, they should do their patriotic duty and start to bring
their income onshore, along with as many jobs as possible for
American workers. This GAO report will help the Finance Committee
develop a better understanding of how the tax code works today for
US multinational businesses, as we determine how changes could
affect our country’s global competitiveness and economic
security."
Grassley added: "The Finance Committee has always been vigilant
on transfer pricing issues. It’s a complicated area of tax policy
theory and practice, especially if intangible assets are involved.
We’ll continue to work toward a system that’s less burdensome on
taxpayers and tax administrators but assures that shared business
activities are properly accounted for in how US-based taxable
income is determined."
The GAO, which based its report on an analysis of Internal
Revenue Service (IRS) data on corporate taxpayers, found that the
average US effective tax rate on the domestic income of large
corporations with positive domestic income in 2004 was an
estimated 25.2%, although there was considerable variation in tax
rates across these taxpayers. The average US effective tax rate on
the foreign-source income of these large corporations was around
4%, reflecting the effects of both the foreign tax credit and tax
deferral on this type of income.
Effective tax rates on the foreign operations of US MNCs vary
considerably by country, according to the report. Estimates for
2004 show that Bermuda, Ireland, Singapore, Switzerland, the
United Kingdom, Caribbean Islands, and China had relatively low
rates among countries that hosted significant shares of US
business activity, while Italy, Japan, Germany, Brazil, and Mexico
had relatively high rates.
US business activity (measured by sales, value added,
employment, compensation, physical assets, and net income)
increased in absolute terms both domestically and abroad from 1989
through 2004, but the relative share of activity that was based in
foreign affiliates increased. Nevertheless, as of 2004, over 60%
of the activity (by all six measures) of US MNCs remained located
in the United States. The UK, Canada, and Germany are the leading
foreign locations of US businesses by all measures except income.
However, the GAO concluded that the reporting of the geographic
sources of income "is susceptible to manipulation for tax planning
purposes" and appears to be influenced by differences in tax rates
across countries.
"Most of the countries studied with relatively low effective
tax rates have income shares significantly larger than their
shares of the business measures least likely to be affected by
income shifting practices: physical assets, compensation, and
employment. The opposite relationship holds for most of the high
tax countries studied," the GAO stated.
Baucus stated that he intends to work with Committee members to
plan roundtables and additional hearings in preparation of
"full-fledged" tax reform in the next Congress.