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By Linda Evans, Director Global Tax Policy, IBM Government and Regulatory Affairs
IBM tax policy expert Linda Evans
At mid-year, the “tax reform watch” continues as congressional leaders and Trump Administration officials released their agreed framework for corporate tax reform on July 27. It has been said that chances for tax reform are greater given Republican control of Congress and the Presidency. There is bipartisan and bicameral agreement that the high U.S. corporate tax rate is unsustainable for the 21st century global economy. In fact, the U.S. rate has long been eclipsed by those of most industrialized countries since the U.S. last tackled tax reform in 1986.
It was true in 1986 and it is true now that tax reform is a major undertaking as Congress, the Trump Administration and stakeholders consider various options.
So much has changed since 1986 with fiercely competitive new markets and new players on the global stage. IBM has long been engaged over the years, working with Congress and successive Administrations on efforts to modernize U.S. corporate tax rules. With two-thirds of our revenues earned offshore, our global footprint helps sustain domestic operations.
Today, IBM competes in global markets with companies that enjoy lower tax burdens – American global companies such as IBM are therefore at a competitive disadvantage. The must haves for corporate tax reform include a lower competitive tax rate and a move to a territorial international system for overseas earnings. Most industrialized countries including U.S. major trading partners have lowered rates and moved to territorial to help their companies compete and to attract foreign direct investment. Under a territorial approach income earned on overseas operations is subject to tax only by the host country whereas the current worldwide system imposes a second layer of U.S. tax on those same earnings – with credit for foreign taxes paid. In effect, the U.S. system is a complicated, cumbersome outlier compared to the rest of the world where countries have changed their rules for competition in a more globally interdependent market economy.
As the U.S. remains with its high corporate rate, other industrialized countries continue to reduce their rates as well as enact robust incentives to retain and attract investment. The high U.S. rate coupled with an outdated worldwide system that taxes foreign earnings twice can lead to suboptimal behavior in keeping certain foreign earnings offshore. For some companies, it may make more economic sense to seek overseas investments or retain cash, than bring profits home and pay a higher rate. If earnings are kept offshore for other than economic and business reasons, this cannot be helpful to domestic economic growth and job creation.
The sooner the U.S. can reduce its corporate rate and reform the anti-competitive and anti-growth tax code, the sooner American companies can compete more effectively around the world. An updated territorial system coupled with a competitive corporate rate is an effective combination to attract foreign direct investment and retain domestics. We remain actively engaged in the process at the highest levels, including IBM’s Chairman, President and CEO, Ginni Rometty.
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