A US lesson on how not to do tax reform–Economic Times–04.12.2017

The euphoria over the US Senate clearing a sweeping tax overhaul that includes a permanent cut in the corporate tax rate to 20% from 35% must be tempered with caution. Republicans believe that a lower rate will help attract inward investment, spur growth and create more jobs. Such presumption is simplistic.

Many companies that operate globally make use of the differences in rules between countries to lower their tax outgo.

The fact that taxation is local while business is global gives rise to numerous tax planning opportunities that bring the share of corporate income tax in advanced country revenues to absurdly low levels. The solution is for countries to cooperate to end base erosion and profit shifting.

Some large MNCs, for instance, use a combination of Irish and Dutch subsidiary companies to shift profits to low or no tax jurisdictions, a tax avoidance technique known as ‘Double Irish With A Dutch Sandwich’. Instead of taxing companies on their global income while allowing indefinite tax deferral on foreign subsidiary income, the US must cooperate with other countries to accept the principle that companies pay tax on income generated in a particular jurisdiction to its authorities. The US must consider OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to prevent base erosion and profit shifting. Automatic sharing of information should be accompanied by the creation of a unique legal entity identifier for transparency of beneficial ownership.

Anon-partisan US Senate Joint Committee on Taxation has warned that the tax cuts would add significantly to the federal deficit—$1trillion over a decade. Such kind of tax pruning would drive up government debt, curtail growth and make it more expensive for businesses to raise capital and create jobs.

This piece appeared as an editorial opinion in the print edition of The Economic Times.
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via A US lesson on how not to do tax reform

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