On April 1, the Senate Permanent Subcommittee on Investigations
held another hearing on multinational corporations that actively
reduce their worldwide tax burdens by shifting profits out of the
U.S. Senators and witnesses disagreed as to whether the specific
transactions that U.S. corporate taxpayers use to move income to
entities outside the U.S. (to other entities in their worldwide
group) should be subject to scrutiny or praised. Some senators even
questioned the propriety of the hearing itself.
Unlike prior similar hearings that focused on IT companies, this
hearing focused on domestic manufacturing companies. In the typical
transactions, companies restructured their foreign operations so
that non-U.S. subsidiaries organized in low-tax jurisdictions would
pay the domestic operating subsidiaries a small markup in exchange
for providing all of the services and support required to perform
certain foreign sales, resulting in a significant amount of the
profits being reported abroad as opposed to the U.S. Although the
location of the profit-making activities did not change, in one
cited case, this activity netted $2.4 billion in U.S. tax savings
over a 12-year period. While a few senators and witnesses argued
that these type of arrangements were unsupported by the tax law and
should have been challenged by the IRS, many others argued that
these arrangements complied with all relevant statutes,
regulations, and case law, and in fact represented activities that
reasonable businessmen and businesswomen should engage in as
fiduciaries of the company.
While the subcommittee members argued that the real problem was a
broken tax code, many suggested that different flaws were to blame.
Republican members argued that the high corporate tax rate causes
U.S. multinationals to move their activities offshore, and that the
U.S. corporate rate needs to be reduced in order to maintain
worldwide competitiveness. Democratic members argued that the rules
regarding interparty and cross-border transactions need to be fixed
so as to prevent income from domestic activities from being
reported abroad. Due to disagreements about the appropriateness of
subjecting any specific taxpayer to this type of public scrutiny
and the egregiousness of the transaction at issue, the Republican
members refused to sign onto the subcommittee's scrutiny of
these taxpayers.
This type of congressional action seems to be the precursor to a
meaningful debate that could result in a significant reduction in
the U.S. corporate tax rate, or a change in the rules that would
make is difficult for U.S. multinationals to move their operations,
and hence profits, to non-U.S. group members located in
jurisdictions that offer more competitive corporate tax rates. It
is unlikely that any changes will occur before the 2014 mid-term
elections in November, but depending on the outcome of those
elections, the landscape upon which U.S. multinational do business
could change significantly.
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