How the US Corporate Tax system outsourced your jobs (part V)

Arguments are being formed now by Corporate political allies in Washington to reduce US Corporate Taxes as a means to make US Corporations more competitive. Still others (Bill Clinton, Grover Norquist) maintain transitioning to a Territorial Corporate Tax system will make US Corporations more competitive. They fail to mention transitioning to a Territorial Corporate Tax system will place additional downward pressure on Corporate Tax Rates around the globe. (fig1-part II)

In case you missed parts 1, 2, 3, & 4. they can be found at the links below
Part 1 - http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x88792
Part 2 - http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x88802
Part 3 - http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x88828
Part 4 - http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x88846

Absent for the many arguments is the undeniable truth the USA is engaged in and loosing a Global Trade War. Any additional lowering of the Corporate Tax burden will only be met with additional reductions and additional exemptions in Corporate Taxation Worldwide. Stop thinking “Corporate Taxation” and start thinking “Reverse Tariffs”

“Arms-Length”

The Organisation for Economic Co-operation and Development (OECD) has adopted the principle in Article 9 of the OECD Model Tax Convention, to ensure that transfer prices between companies of multinational enterprises are established on a market value basis. In this context, the principle means that prices should be the same as they would have been, had the parties to the transaction not been related to each other. This is often seen as being aimed at preventing profits being systematically deviated to lowest tax countries, although most countries are also concerned about prices that fail to meet the arm's length test due to inattention rather than by design and that shifts profits to any other country (whether it has low or high tax rates). It provides the legal framework for governments to have their fair share of taxes, and for enterprises to avoid double taxation on their profits.

http://en.wikipedia.org/wiki/Arm%27s_length_principle

An estimated 60% of all international trade happens within, rather than between, Multinational Corporations. Global Financial Integrity in Washington estimates an amount of several $100 Billion dollars of Taxes are lost annually.

“Transfer Pricing”

When a Cross-Border difference exist in Corporate Tax Rates an incentive is created to engage in Transfer Pricing that reduces the Tax burden in the High Corporate Tax Territory. The USA Corporate Tax policy has engaged in a “Tax Umbrella” policy by offering Foreign Tax Credits on American Corporations operating outside the boarders of the United States. In theory the United State’s Tax Umbrella would hinder global downward pressure on Corporate Tax Rates to advert a Global Trade War – in theory

The United States Corporate Tax regulations require that all Intercompany Transfer pricing between related parties (Subsidiary/Parent Corps) in separate tax jurisdictions be at arm's length. The United States Corporate Tax regulations do not, however, require that a taxpayer prepare documentation that supports this. Documentation, per the United States Corporate Tax regulations, is entirely optional, and even then do not require 3rd party analysis of the pricing structure. Additionally Corporate Tax Lawyers will recommend against using 3rd party analysis in initial filings.

http://www.altusecon.com/faq.html

“Check-the-Box" regulations

"Check-the-box" regulations, adopted in December of 1996, drastically changed the rules governing the classification of entities for U.S. federal tax purposes as partnerships or as associations taxable as corporations. In the international arena, except for certain listed forms of organizations in various countries which are always classified as corporations, a foreign entity can elect whether to be treated as a partnership (i.e., a pass-through entity) or a corporation for U.S. federal tax purposes. Moreover, an eligible entity which has but one owner and which elects partnership (i.e., pass-through) treatment is disregarded as a separate entity for U.S. federal tax purposes, rather, its activities are treated as a sole proprietorship, branch or division of its owner.

These arrangements generally involve the use of deductible payments to reduce the taxable income of a controlled foreign corporation (Subsidiary Corporation) under foreign law, thereby reducing the CFC's foreign tax and, also under foreign law, the corresponding creation in another entity of low-taxed, passive income of the type to which subpart F was intended to apply."

In 2004, U.S.-based multinational corporations paid about $16 billion in U.S. taxes while earning about $700 billion offshore, an effective tax rate of about 2.3 percent, according to the administration statement. The top marginal tax rate for U.S. companies is 35 percent; drug companies such as Amgen Inc. and technology companies such as Microsoft are among companies that make the biggest use of tax-deferral benefits.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a4.7CIfqd5h0

So the question remains: Is transferring manufacturing production to China’s $4 a day low-tech workforce a viable economic model by itself? - Given that 60% of ALL World Trade is “Intra-Corporation Transfer” would certainly suggest not.

For the argument of “Cheap Labor” to be true

Multinational Corporations would have to give up numerous profits gained through deducting “Interest Paid” from financing their own operations by the profits held offshore in Tax Haven countries under a Subsidiary or Parent Corporation.

Drug Giants who produce exclusively and sell exclusively in the United States would not be sheltering enormous profits from transferring Patent Rights of the drugs they produce to Offshore Tax Havens.

Google would have to pay an additional $Billion in Taxes sheltered by transferring Intellectual Property Rights to an Offshore Subsidiary

Electronics Manufacturing Giants operating in 3rd World Countries have to create their own infrastructure to facilitate operating their overseas plants. Basic infrastructure taken for granted here in the United States and subsidized by our tax dollars such as a Power Grid, Communications Net, a Clean abundant Water Supply, Transportation Network (roads), Security, even safe housing for the work force and management must be factored into their operating cost. Presently these cost in addition to Foreign host country Taxes can be deducted against the United States Corporate Tax bill.

Cisco built a college in China to train a workforce for the plant it operates in China. The cost of the project is deducted as operational cost from the US Tax burden through Foreign Tax Credits in the US Corporate Tax Code

On Edit

I'm done, I said it and I'm pretty convinced the current Corporate Tax Structure will eventually lead to the destruction of America's Middle Class. I'm equally confident no plan was formulated or hatched by some clandestine "Evil Empire" but rather the general acceptance of "Greed is Good" and the Human Condition of always wanting more. Together with the promise of the American Dream and another seldom referred to Human Condition known as Hope.

I hope my children can have a Bright future, I hope that some day I can be Rich like them, I hope the American Dream can be my reality