DFL House and Senate leadership are right to be united for fairer corporate taxes
GOP and corporate lobbyists are in desperate search for a reason to oppose fair tax policy reform
An activist in Berlin in 2016 is clutching a suitcase stuffed with fake money, demanding greater trasparency in new legislation following the Panama Papers affair. The Panama Papers exposed large-scale offshore tax avoidance for thousands of clients of the firm law firm Mossack Fonseca. Photo by Sean Gallup/Getty Images.
Last week, Senate Taxes Committee Chair Ann Rest revealed her omnibus tax bill and it contained a major surprise: A provision called worldwide combined reporting would end one of the most popular forms of corporate tax avoidance by requiring multinational corporations to pay income taxes based on their global profits, rather than just the portion they choose to declare within the United States.
The proposal, which had already been included in House Tax Chair Aisha Gomez’s omnibus bill, kicked up a fuss among Republican legislators, corporate lobbyists and journalists whose reactions seemed somewhat ahead of their comprehension.
The policy may prove an implementation challenge for the state Department of Revenue, but conceptually it is not very difficult to understand. And once you do understand it, it’s pretty hard to disagree with.
Here’s a rundown:
Currently, multinational corporations are able to lower their federal and state taxes by shifting profits into low-tax countries, sometimes called tax havens. For example, a firm may transfer a patent to a subsidiary in a low-tax country and then pay that subsidiary (paying itself, essentially) to lease patent rights back to their entity in the U.S. The lease payments show up as a cost for the U.S. partner, thus lowering U.S. taxes owed, while shifting profits to the tax haven.
Complex tax avoidance maneuvers like this have no basis in economic substance. Major multinational corporations get away with it simply because they have the money and resources to do so, while regular Minnesotans and small and local businesses pay the full taxes they owe. Allowing multinational tax avoidance is a policy choice, and Minnesota can choose differently.
Worldwide combined reporting would end practices like this by requiring corporations filing taxes in Minnesota to declare their complete worldwide income rather than just the portion they have chosen to ascribe to the United States. The formula used is fairly simple and almost identical to the way corporations currently split up their tax liabilities between states within the U.S.
Right now, to determine the taxes they owe in Minnesota versus California or Iowa, a corporation will tally its total U.S. profit, and then multiply that base by the fraction of U.S. sales that occurred within each state. So, if a corporation makes 10% of its U.S. sales in Minnesota, it will pay Minnesota corporate income taxes on 10% of its U.S. profits.
Worldwide combined reporting would simply expand that formula to include global profits and global sales, rather than just those recorded in the United States. The total profit figure would rise, but so too would the volume of sales.
In most cases, Minnesota would get a smaller slice of a larger pie. But, importantly, the new policy would only result in a tax increase for corporations that record disproportionately high profit margins outside of the United States.
Small and locally owned businesses wouldn’t be affected, and it would make no difference whether a business was headquartered here or in another state. The only way to avoid the tax would be to stop earning profits in Minnesota, which wouldn’t make economic sense.
For these reasons, the standard conservative arguments about tax competitiveness between states are even less relevant than usual, and the case against worldwide reporting is an especially tough one to make.
This will put the GOP and the business community in an interesting position. To oppose it outright, they would have to side with tax-dodging corporations over local businesses that lack the means to move profits to the Cayman Islands. That’s a bad look, so what they have done instead is cry technical difficulty.
The reliable but business-friendly Center for Fiscal Excellence shared some valid questions in a recent newsletter. Most of them center on accounting burdens for corporations and the fact that different countries define profit differently. Those are reasonable concerns to raise — but are they serious enough that we should abandon a chance to end multinational tax avoidance?
Seven states already have a worldwide combined reporting option and, tellingly, multinational corporations often choose to file a worldwide return when their losses among foreign subsidiaries are higher than those in the U.S. Evidently, the accounting burden is not too heavy when there are tax dollars to be saved.
International audits may also be difficult, but the pessimistic outlook ignores several reasons this push might be well-timed: The recently enacted federal corporate alternative minimum tax already entails accounting similar to that required by worldwide combined reporting. Minnesota could piggyback off that.
The proposal also moves Minnesota in the same direction most developed economies are headed through the OECD’s BEPS convention, which aims to end international tax avoidance. This is a different global context than when states last had worldwide reporting policies and encountered international friction during the 1980s.
The biggest risk is that the policy won’t raise quite as much money as is being anticipated. Corporations don’t like paying taxes, and they fear a precedent that could spread to other states. If corporate obfuscation and foot-dragging impede collections, it could result in revenues falling below expectations.
That could be a problem, but it doesn’t mean worldwide reporting is the wrong idea. In fact, if multinational corporations are kicking up a fuss, we are probably on the right track.
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