Multinational corporations are becoming more aggressive at avoiding taxes through techniques like shifting profits overseas, according to a new report from the Organisation for Economic Co-operation and Development (OECD), a group of 36 mostly developed countries including the United States. U.S. policymakers should heed that warning as they consider various international tax proposals, including one prominent proposal — “territorial taxation” — that could significantly worsen the problem.
Stating that the continuing erosion of the corporate income tax “constitutes a serious risk to tax revenues, tax sovereignty and tax fairness for OECD member countries and non-members alike,” the OECD report says:
A lack of response would further undermine competition, as some businesses, such as those which operate cross-border and have access to sophisticated tax expertise, may profit from [tax planning] opportunities and therefore have unintended competitive advantages compared with enterprises that operate mostly at the domestic level.
As our recent report explains, the U.S. tax code has precisely this unfavorable tilt: it creates incentives for U.S. multinationals to lower their U.S. tax bills by shifting profits offshore, using the sorts of tax avoidance activities techniques that the OECD report highlights. This not only creates a bias against domestic profits and investment, but drains tax revenues at a time when policymakers are trying to reduce budget deficits.
The OECD report recommends that countries improve coordination of international tax rules and enforcement efforts and tighten up their own tax regimes. A good first step for U.S. policymakers would be to adopt the international tax proposals in the President’s fiscal year 2013 budget, which would reduce incentives for corporations to shift profits and investments overseas — and also reduce deficits by strengthening corporate tax revenues.
By contrast, adopting a territorial tax system risks worsening the bias towards overseas profits and investment by setting a very low or zero U.S. tax rate on overseas profits. See our report for details.