Wednesday’s tax panel during day two of the CPA Annual Conference saw perspectives from senior elected officials from both major political parties on where tax policy is heading next. In his message delivered to conference attendees today, Senator Mike Crapo (R-ID) said the 2017 Tax Cuts and Jobs Act “leveled the playing field for U.S. business” competing against foreign companies who enjoy much lower corporate tax rates.
Congressman Bill Pascrell (D-NJ), on the other hand, pointed out how the 2017 tax law has led to less corporate tax revenue coming into the federal government.
However, the good news is that in the March 16 Senate Finance Committee hearing on the impact of taxes on manufacturing, no one in the room mentioned the usual terms of “paying their share” – suggesting that the Senate will not be a slam dunk on proposals from Democrats to increase taxes. What appeared more clear from today’s session is that there are nuances to taxes against corporations that both parties haven’t seen eye-to-eye on yet. One party sees all corporate taxes as bad. Another one is saying let’s just put higher taxes on the global giants, like General Electric or Ford. Both companies recently moved factories out of Ohio in favor of Mexico and China, despite the lower C-corp rate.
CPA’s Tax Policy Director and moderator, David Morse, tried to steer the discussion towards Sales Factor Apportionment, which would be a tax on income derived from sales in the U.S. The SFA is the brainchild of Bill Parks, a long-time CPA member, and retired business leader.
Sales Factor Apportionment is a territorial tax system designed to tax business profits based on where the sales of the company are located. So, the tax on a company’s profits is based (apportioned) on the proportion of worldwide sales made in the U.S. If a company sells 40% of its worldwide sales here in America, the company needs to only pay U.S. taxes on 40% of its worldwide profit. Sales Factor is also known as Destination-Based Profit Tax or Destination-Based Sales Factor Apportionment.
“I owe a big thanks to Bill Parks for his shared thoughts on ideas for a simpler tax reform like Sales Factor Apportionment,” Crapo said.
“I can envision this being discussed in upcoming hearings in Washington,” Pascrell said. “So be prepared.”
For now, from what we have gathered from some panelists, it seems the multinationals could face a tax hike. Newly installed Treasury officials are advocating for these changes to taxes of the large-cap companies, though we are not sure if a C-corp change would exempt certain businesses or have a revenue floor that exempts some companies from the increase.
“We can debate what the fair share is for the big corporations, but we know that SMEs pay close to the statutory rate already,” said Zach Mottl, chairman of CPA and a senior executive at Atlas Tool. “The MNCs have tax advisors that enable corporate tax avoidance. We don’t.”
In theory, a Sales Factor Apportionment would be the best way around that. You can headquarter in the Bahamas, but if you’re selling goods and services to U.S. domiciled consumers, SFA applies.
Rueven Avi-Yonah, a member of the steering group on tax research for the Organization for Economic Cooperation and Development, backs SFA. “The traditional state formula focuses on payroll assets and income, but if you’re going to tax based on that, companies will just move to lower tax rates,” he said. “The U.S. would benefit from an SFA. You import more than you export so you would gain revenue.”
For Mottl, he just wants to keep it simple and maybe a C-corp rate, if hiked, would end up being for anyone who files corporate income taxes, whether that’s a $1 million a year business, or a $50 billion a year business.
“Simple solutions are the best ones,” he said, adding that new considerations for OECD members on taxation is being tossed around now under the so-called Pillar One and Pillar Two profit allocation rules. The OECD rules are already quite complicated, Mottl told panelists. “Companies know where they sell their product and where they make their product so if you sell your widget in the U.S. you pay taxes on sales generated from the U.S. If the OECD not willing to do (SFA), then maybe the U.S. goes it alone and takes the lead on this issue.”
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