Sullivan: Tax Reform Goals Differ for Corporate Coalitions

Martin A. Sullivan (Tax Analysts), Tax Reform Goals Differ for Corporate Coalitions, 134 Tax Notes 1481 (Mar. 19, 2012):

Martin A. Sullivan discusses how the divided interests of corporate America could create a stumbling block to corporate tax reform.

When it comes to taxes, corporate America is divided into two parts. First, there are companies that pay full freight. Their effective tax rates are close to the statutory 35 percent rate. They tend to be low-tech and labor-intensive, and -- most of all -- they have most of their profits in the United States. Then there are those companies that collectively save tens of billions of dollars each year by taking advantage of loopholes in the transfer pricing and anti-deferral rules. Their effective tax rates are significantly less than 35 percent. They are technology-intensive and pack a lot of their profits in tax havens.

As the drumbeat for tax reform grows louder, the priority for members of the first group is easy to understand. Existing tax breaks don't do much for them, so a tax reform that cleaned up the code and lowered the rate could be a big plus. The membership of the RATE Coalition, a group dedicated to reducing the corporate tax rate, is made up mostly of this type of company. Its membership includes AT&T, Home Depot, Disney, and Macy's.

The tantamount concern of members of the second group is international taxation. That manifests itself in three general policy thrusts: (1) thwarting President Obama's perennial proposals to raise taxes on foreign profits; (2) securing a repeat of the 2004 tax holiday for repatriated foreign profits; and (3) moving the United States from a worldwide to a territorial system of international taxation. For territorial taxation, the proposal must be devoid of any significant expense allocation, thin capitalization, and anti-deferral rules to get the support of this group. (The revenue-neutral territorial proposal by House Ways and Means Committee Chair Dave Camp, R-Mich., does not make the grade.) Companies with this profile can be found among the members of the WIN America Campaign, a coalition dedicated to securing tax relief for repatriated foreign profits, and they include Apple, Microsoft, Pfizer, and Cisco Systems.

Figure 1 shows the share of foreign profits as a percentage of worldwide profits for the coalitions' members that are publicly traded corporations. These are three-year figures from each company's latest SEC Form 10-K. The difference between the two coalitions is striking. Of the 21 RATE members, only one, Nike, has more than half of its pretax profits outside the United States. Of the 19 WIN America members, 11 have more foreign than domestic profits. Four companies -- Brocade, Autodesk, Pfizer, and Broadcom -- reported losses in the United States even though they were profitable on a worldwide basis. [Click on chart to enlarge.]

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