There was a surprising moment of recklessness at a Senate Finance Committee hearing. And it came in the middle of a rather dry discussion about US tax policy. In an exchange that focused on obscure provisions of the Tax Cut and Employment Act (TCJA) of 2017, Senator Tom Carper (D-DE) asked, “Should the beat go on?”
Carper actually asked a valid question. In this case he was referring to “BEAT” – the border erosion control tax. Carper wondered what BEAT provision was in the 2017 tax code – why it had failed and how to fix it.
At the same hearing, Treasury Deputy Assistant Secretary Kimberly Clausing stated that the BEAT provision is intended to appeal to foreign companies investing in the US. Such an investment often takes the form of a foreign multinational buying a company or property in the United States. However, when many of these multinationals buy US assets, they later claim that the resulting profits should not be taxed by the US Treasury Department. Instead, thanks to current tax law, they simply claim their residence in offshore tax havens and take their ample profits overseas with them. This will help them avoid paying US taxes – and the Treasury Department has an empty bag in hand.
The BEAT tax rule was originally designed as a means of managing such profit shifting. However, since this is only the case in complex and extreme cases, the expected income could not be increased. Therefore, Carper has rightly questioned whether BEAT should continue to be part of corporate income tax.
U.S. manufacturers have been grappling with the COVID-19 pandemic for more than a year, and Carper carefully noted that BEAT’s failure has harmed hard-working American companies. In essence, BEAT has neutralized tax breaks that these domestic producers may have rewarded and instead encouraged more companies to actually move production overseas.
Realistically, BEAT failed because it is too complicated at its core – and requires a team of tax specialists. However, this also points to a bigger problem with US corporate tax law: US tax law simply contains too many incentives that encourage multinational corporations to move profits out of the US.
Congress must finally recognize this fundamental problem and reshape US tax law to remove the tax advantages of foreign multinationals.
The answer is pretty simple. And with Congress considering comprehensive infrastructure and business cycle legislation, there is clearly an opportunity to expand new, sensitive issues into sensitive issues like fair taxes.
The American people would agree that it is unfair for multinational corporations to sell products in the US market and then pay little or no federal taxes on the profits made. This makes little sense, especially at a time when the Treasury is running record deficits – and US companies are already carrying a significant tax burden.
The answer is to tax overseas multinationals based on their sales in the United States. If a company makes $ 1 billion in profits on its US sales, it should pay corporate taxes on those $ 1 billion. Congress should no longer allow multinational corporations to perform tortuous profit calculations or take up residence in a dark offshore location in order to evade US tax obligations.
Such an approach is commonly referred to as “Sales Factor Apportionment”. It’s an alternative that should replace the BEAT tax rule to finally tackle the profit shifting overseas businesses are currently enjoying.
Carper asked the right question in the recent Senate hearing. The answer is “no” – the BEAT shouldn’t go any further. The BEAT currently enables strict tax avoidance systems for foreign companies. That’s not fair to hard-working US companies. And it changes the Treasury Department at a time of massive deficits. Congress must ensure that, as the tax discussions continue, the aim is to close the tax loopholes that multinational corporations currently favor over domestic corporations.