Chasing Business Taxes Wherever Companies Choose a Home

The European Union (EU) is seeking an approach on business taxes that retains more of Internet firms’ earnings as taxes for itself.  The EU has been spooked by foreign Internet companies’ selection of “tax homes” with especially low rates. 

Ireland has been a very popular choice of US high tech firms for reporting and paying taxes on their European sales.  Tackling the shortfall of EU business taxes is in play at the same time as the US hopes to reform its tax code.  US Businesses could be trampled by the boisterous tax elephants.

The US business tax rate is 38.9%, about double the European average of 18.35%.  France’s rate is 34%, Ireland’s is 12.5% and Hungary’s is 9%.  It is no surprise that when firms can select where to be taxed, they usually select a country with a low rate. 

The EU feels short changed and is determined to force Internet firms to declare earnings or sales by country based on where the value is created.  For any one firm, that would cause some earnings to be taxed at high rates and some earnings taxed at low rates.

Estonia, the current head of EU’s tax group, favors a proposal that would impose a tax at the country’s customary rate for income earned within each country.  Estonia’s aim would nullify a firm’s ability to choose a low tax rate home, and then declare all revenue for taxing at the low rate.

France, Germany, Italy and Spain prefer to address the tax revenue shortfall by using a tax equalization tactic that imposes a levy on sales of Internet firms.  The levy would be variable and would set the tax at a level that closes the gap between the business rate within each country and what the Internet firm already paid.  This tactic (as with all sales taxes) would dissuade Internet firms from making capital investments in countries that impose the equalization sales tax, because they would be allowed no tax offset for that expenditure.

At the same time that the EU is revamping how much it taxes Internet firms, the US is also trying to reform its tax code.  An outline of the reform plan is expected on Sept 25, 2017, but senior leaders on the Hill indicate there is disagreement on what the legislation should contain and an approved bill is unlikely to be passed before the end of 2017.

The White House’s proposal would set the top business tax rate at 15%, and would continue allowing capital investment depreciation deductions.  The proposal is for a territorial tax system – one that taxes domestic income, but not on foreign-earned income.  France also uses a territorial tax system and the practice avoids double taxing firms’ foreign earnings.  For a small one-time fee, the US proposal would allow US corporations to repatriate their trillions of dollars in foreign earnings currently held offshore.  The US firms’ cash pile was collected in an attempt to avoid double taxation.  The US wants the cash repatriated to help with infrastructure investment in the US. 

The US and EU tax plans may clash.  An EU discussion on which plan to pick will be held this month.  Tax changes in the EU require unanimous approval, and some small EU members oppose both the Estonian and the French proposal, so US tax reform may be in place before the EU revises its tax on Internet firms.

Tax reform is frequently discussed but rarely enacted.  Tax policies of major trading partners is an obvious factor that should have an influence on new tax laws, because tax is one of the tools used to assure that a country’s exporters face a level playing field.

If the EU imposes an equalization sales tax, it could react to the US plan for a small repatriation tax on US firms.  The small tax could be seen as a suitable trigger for the proposed French sales tax. 

The specter of a sudden sales tax levy on trillions of dollars could stall repatriation to the US, and limit a financing source that the US hoped to see used in infrastructure initiatives.  This is another good reason to move quickly on US tax reform – before the EU levies another tax against US firms.

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