Companies vie to have their voices heard in tax reform debate; some at cross purposes.
There is a good article in today’s Wall Street Journal about where different companies stand when it comes to corporate tax reform. Unfortunately, with so many companies with differing goals tax-wise, there will be winners and losers if reform does ever come to fruition.
And many companies now are lobbying congressional leaders Sen. Max Baucus and Rep. Dave Camp to make sure their interests are addressed. Also on companies’ radar is the Friday, July 26, deadline by which Senators Sen. Baucus as well as Utah Senator Orrin Hatch are seeking proposals from fellow Senators on what federal tax breaks they want to see retained or reformed as part of comprehensive tax reform.
The argument for reform, companies say, is that they pay the highest effective tax rate in the developed world – 35 percent. However, many pay far less. According to a Government Accounting Office report in late June, some companies pay less than half of that 35 percent effective tax rate (see related story here). The GAO says companies were paying federal income taxes amounting to about 13 percent of the pretax worldwide income that they reported in their financial statements.
Therefore, reform could upend what amounts to a free ride for some companies. This is something International Treasurer highlighted in a story last year. In that story we broke down the diverse constituencies pushing for different outcomes:
Tax vs. liquidity planners. Whereas tax directors may be focused on negotiating in order to mitigate the effective tax increase (via loopholes and deductions) as well as the optics of nominal rate increases, treasurers should weigh in to get liquidity utilization in the mix of “asks” US MNCs lobby for in return for paying up on offshore earnings.
As more cash builds up in places where it is trapped for other reasons, it simply becomes more valuable to free cash trapped by the US tax code.
Offshore cash-rich MNCs vs. more domestic-focused US corporates. Firms with increasing earnings and cash offshore (e.g., tech and pharma) will have different trade-offs than US corporates with larger domestic earnings and lower offshore cash balances (e.g., retailers and transportation firms). Already, efforts to shift the US to a territorial-based tax system need to account for more domestic-oriented firms that value a lower corporate rate more than allowing offshore earnings to escape US taxation.
Stumbling blocks
Corporations face a number of hurdles when it comes to convincing the powers that be that they need lower taxes, particularly in light of the GAO report. But politically it will be tough as well, as filling the gap with new domestic revenue will be difficult for years to come. Therefore, as we wrote in 2012:
“It’s more likely that domestic-focused firms will be pointing to offshore earnings in their tax reform negotiations,” IT wrote last year. “Unfortunately, this means that MNCs should lower expectations for a pure territorial regime to be part of forthcoming tax reform. It also means that policy-makers will attempt to divide and conquer US corporate interests.”