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So if you're a US citizen or permanent resident or even just a tax resident (which includes working here on a temporary visa), the US taxes you on worldwide inc
by cletus 9y ago
So if you're a US citizen or permanent resident or even just a tax resident (which includes working here on a temporary visa), the US taxes you on worldwide income. Any income from overseas needs to be reported (up to 3 times!) and taxed. With most countries you get credit for any taxes you paid in those countries. State taxes work the same in that you may have to file in more than one state and credit is given from taxes in one state to the others. This is actually all pretty sensible albeit tedious (particularly the part about reporting foreign assets and income).
Where it starts to go bonkers is for US citizens and PRs who live overseas. They still have to file taxes with the IRS for all worldwide income and report foreign assets and income as if they were present in the US. They get a certain amount of income (<$100k) each yeah exempted from US income taxes. Most countries do not do this.
My first problem is this: why exactly can't we treat companies the same way? I would be all for a 20% corporate tax rate if it meant a tax on worldwide income with credits for any taxes paid to foreign governments... exactly like individuals are treated. Why isn't this on the table? Is it that hard?
Second problem: in this world of multinationals and particularly when dealing with IP, companies seem to have free reign to book income in any country they like. Like any sales in the UK (and probably the EU as a whole) are reported to Irish subsidiaries.
To me this is fundamentally wrong. In other instances this is called transfer pricing and is illegal. For completeness, the classic case of transfer pricing is this:
Acme Inc buys a sofa from China for $200 in China and sells it in the US for $1000. That's $800 taxable profit right? Not so fast. Acme Inc instead forms a subsidiary in the Cayman Islands who buys that sofa from China for $200 and then sells it to the parent company for $990. Now only $10 is taxable in the US and $790 is taxed in the Cayman Islands at a zero or near-zero rate.
Now if that money is ever repatriated it's taxed. Thing is, it never is. Not until an ill-advised tax holiday and then the whole cycle repeats.
This brings me to the third problem: to get around the fact that all their money is offshore, companies borrow money in the US, which up until 1-2 years ago was at zero or near-zero levels. This debt covers their expenses and saves them from repatriating foreign profits and paying tax on them.
So why exactly don't we treat ever $1 borrow as repatriating $1 in foreign profits and tax it?
Now that would be true tax reform. Well, if we also got rid of the noticeably absent carried interest tax credit.
What a joke.
- gok 9y agoWhy won’t the US tax unrepatriated foreign income of corporations like they do for people? One answer is that the only reason they can get away with citizens is that they are a captive audience. Renouncing your US citizenship is painful. Corporate re-headquatering isn’t so hard. Since a corporation can pick a home country, why would they pick the only country in the world that taxes money made both overseas and domestically?
- cletus 9y agoIt's not a question of picking a home country. If you operate in the US, you're subject to US laws. Give companies the choice of not operating here in the US at all or paying (at least) the US corporate tax rate on all profits either by paying the US or by paying some foreign government (which with double taxation would be credited towards US taxes owed). Imagine if the EU also did this. It would go a damn long way to ending this absurd practice of offshoring profits.
- gok 9y agoSo if you’re legitimately based in a country with low or no corporate income tax and you make $1 of profit in the US and $1b overseas, you pay the US tax on your entire income? Who would agree to that? It would also be a flagrant violation of world trade rules.
- cletus 9y agoThis is an example of where the perfect is the enemy of the good. The point here is to capture the (now) trillions of multinationals that are made almost exclusively in the developed world but aren't taxed anywhere near reasonably anywhere in the developed world. Laws can be written to say things like "substantial operations" in the US. Software engineers tend to have a problem with the discretionary and subjective language that is common in the law. But such language would allow the likes of the IRS to capture most of the squirrelled trillions. And if some of it isn't who cares? In case you're not from or familiar with the US system, there are countless examples of this. Take sales tax. By the US constitution, the Federal government has the right to tax interstate commerce. The states don't. This led to a problem in the Internet era where people were shopping online and Internet retailers were under no obligation to collect state sales taxes. Technically consumers were liable for them anyway (so-called "use taxes") but many never reported them. Companies with a presence in the state however were obligated to collect those sales taxes as their presence made them subject to state laws. This is why if you shop from B&H or Adorama you only pay taxes if you live in the state of New York (NJ too for Adorama IIRC). But some years ago the state of New York went after the likes of Amazon with a so-called "Amazon tax". Such a move by the states was inevitable and I believe now Amazon collects sales taxes everywhere. This puts them on the same footing as the likes of Walmart. So there are still retailers around that are small enough they don't merit the Amazon treatment but who cares? The point was to get to a "good enough" solution rather than a perfect solution.