1000s Of American Jobs Could Be Lost If This…

Guest Post by Mark Nestmann

Leave it to bureaucrats to decide that while some competition is good, too much is bad. In a nutshell, that’s what the Organisation for Economic Co-operation and Development’s (OECD) ongoing campaign against lower taxes is all about. And now, they’re taking it to a whole new level.

Back in 1998, the OECD’s Committee on Fiscal Affairs (CFA) released a report outlining what it perceived as a dangerous trend: more and more countries were reducing taxes. The OECD called this trend “harmful tax competition.” It was dangerous, according to the OECD, because it had the potential to reduce tax revenues in nations that didn’t wish to engage in tax competition.

To help fight harmful tax competition, the OECD proposed that low-tax countries be forced to cooperate in tax investigations by high-tax countries. It also called for sanctions against jurisdictions engaging in harmful tax competition.

While it hardly seemed possible in 1998 that the OECD would get its way, that’s exactly what happened. Fast forward to 2015, and the OECD’s “global information exchange standard” is nearly in place. The Obama administration gave the effort a big boost by enacting the Foreign Account Tax Compliance Act (FATCA) in 2010, with the end result that more than 60 countries, including several low-tax jurisdictions, have agreed to exchange information on foreign customers in local banks, trust companies, etc., in order to avoid possible sanctions.

However, the OECD is just getting started. It’s a bit like the old saying, “Give an inch and they’ll take a mile.” Its latest campaign is to crack down on a practice it calls “base erosion and profit shifting” (BEPS). Essentially, the “War on BEPS” is designed to prevent companies from routing profits through low-tax countries. The aim is to put a stop to the global erosion in corporate tax rates, which have declined from an average of almost 50% in the early 1980s to 25% today.

For instance, Apple Computer pays tax on its global income at a rate of less than 10%, less than one-third of the top US corporate tax rate (35%). To the bureaucrats at the OECD, that’s simply an intolerable situation.

The BEPS initiative is designed to put an end to this kind of legal tax avoidance. It would force companies to cough up mountains of data on their structure and operations. Based on an analysis of this data, national tax authorities would then apportion corporate taxes based on concepts such as “location of the economic activity” and “value creation.”

The Obama administration, which seems never to reject an idea that could lead to higher tax revenues, eagerly signed on to the BEPS initiative. But in the (unlikely) event that Congress goes along, the US is likely to experience a jobs drain unlike anything it’s ever experienced.

That’s because once BEPS is in place, the only way for US multinational corporations to take advantage of lower tax rates in other countries is to relocate “economic activity” and “value creation” to those countries. Perhaps the most reliable way for a company to demonstrate adherence to these concepts is to move jobs to those countries.

And we’re not just talking about “tax havens” here. The top corporate tax rate in Ireland, for example, is 12.5%, versus 35% in the US. (And Apple has in the past negotiated a special rate of just 2%.) In South Korea, it’s 24.2%. In the UK, it’s 23%.

Add to that mix the fact that many countries have unveiled so-called “patent box” legislation that provides tax incentives to companies that develop intellectual property (IP) there. In the UK, a qualifying company developing IP there can pay a tax rate of 10% or less.

About the only way that the US could adopt BEPS as conceived by the OECD without staggering job losses would be for it to cut its own corporate tax rate to a more competitive level. A 20% corporate tax, for instance, would go a long way toward reducing the incentives for companies like Apple, Google, and Microsoft to shut down their US operations and relocate them to Ireland, South Korea, or the UK.

While the Obama administration is leading the charge for the US to embrace the BEPS initiative, Congress is starting to ask questions about the scheme. For BEPS to work, tax authorities must collect immense amounts of data regarding the structure and operation of multinationals. In the US, that legal authority is entirely absent.

Perhaps the OECD hopes that the US Congress will enact legislation authorizing the collection of this data. But as long as Republicans control both houses of Congress, that’s highly unlikely.

What the BEPS debate might lead to, though, is increased pressure to persuade Congress to drop US corporate tax rates. Even if other countries adopt BEPS, with a more competitive corporate tax rate, US corporations won’t be as tempted to depart, because the reward for doing so will be much smaller.

That’s not a result the OECD – or an organization called the “Independent Commission for the Reform of International Taxation” (ICRIT) – will cheer. Indeed, ICRIT says BEPS doesn’t go nearly far enough. The Commission wants OECD countries to tax multinationals as single firms, and apportion taxes imposed on multinationals between each country in which it operates. ICRITS also wants a global minimum tax rate for multinational companies.

By comparison to ICRITS’s ideas, the BEPS proposal looks positively libertarian. If the BEPS debate in Congress results in lower US corporate tax rates, perhaps we should thank the OECD for helping to foster tax competition!

Mark Nestmann
Nestmann.com