[Richard Rubin | June 7, 2018 | WSJ]
U.S. companies are among the most aggressive users of profit-shifting techniques, which often relocate paper profits without bringing jobs and wages, according to the study by economists Thomas Torslov and Ludvig Wier of the University of Copenhagen and Gabriel Zucman of the University of California, Berkeley.
Mr. Zucman said the research suggests the global trend toward lower corporate tax rates in major countries—including the recent U.S. reduction to 21% from 35%—won’t by itself cause companies to alter their tax-avoidance moves. Companies can still lower their tax bills significantly by shifting profits to places with effective tax rates between zero and 10%.
Such profit-shifting reduces the taxes corporations pay in the European Union by about 20%, according to the paper, with a global annual revenue loss of $200 billion. An earlier estimate by the Organization for Economic Cooperation and Development said all profit-shifting, not just through tax havens, reduces global corporate tax revenue by between $100 billion and $240 billion.
The new research draws on data from countries such as Ireland, Luxembourg and the Netherlands that hadn’t previously been collected.
According to the paper, companies typically make 30 cents to 40 cents in profits for every dollar of wages. In Ireland, which has attracted profits and some investment with its 12.5% corporate tax rate, foreign companies have $8 in profits for every dollar of wages.
The data come from 2015, before the new U.S. tax law and amid efforts by developed countries to cooperate against corporate profit-shifting.
“There are still large incentives and big possibilities for firms to shift profits to low-tax places,” Mr. Zucman said in an interview.
High-tax countries struggle to pull profits back from tax havens, instead focusing their tax-collection efforts on profit-shifting that occurs to take advantage of smaller rate gaps between high-tax countries, Mr. Zucman said. Companies fight harder against audits of shifting to tax havens, making that work less efficient for governments to pursue, he said.
Countries tax corporate income based on where economic value is created, and those definitions lead to disputes about which country gets to tax a given company. Mr. Zucman said the research points toward a system that bases corporate income taxes on the location of sales.
The U.S. tax law enacted last year attempts to find a middle ground.
Under the old law, U.S. companies faced a 35% tax on their global profits. They could get tax credits for paying foreign taxes and didn’t pay the residual U.S. taxes unless they repatriated profits.
That system encouraged companies to book profits in low-tax countries and leave money there. That is exactly what they did. It was easiest for technology and pharmaceutical companies to do this, because their profits come from intangible assets such as patents that can be moved in hard-to-challenge internal transactions.
The new U.S. law lowers the domestic tax rate to 21% and attempts to tax U.S. companies’ foreign profits by setting a floor and a ceiling.
The floor is 10.5%, a statement that U.S.-based companies can’t avoid all U.S. tax on foreign income. The ceiling, at least theoretically, is a 13.125% rate on foreign profits, though some companies say they could pay more than that. because of complexities in the law that they want addressed through regulations. That 13.125% rate is an acknowledgment that a minimum tax that is too high could spur U.S. companies to pursue inversions and other transactions to get foreign addresses for their headquarters.
According to the Congressional Budget Office, the new law would reduce the $300 billion in annual profit-shifting out of the U.S. by $65 billion. Mr. Zucman said it would take two or three years before it is clear how the new law affects profit shifting.
“It’s a very complex piece of legislation, and I think it’s just very hard to guess what’s going to happen,” he said.