One of the topics of the Presidential debates, and of discussions on this blog, was tax breaks that companies get for moving their operations overseas. Are there really such things, such as would encourage businesses to offshore themselves and ditch their US work force?
As far as I can tell, as far as an obvious tax break, no. There is no US program that will give a business a tax credit for, say, building a factory in Bangladesh. But there are benefits that come out of the normal functioning of the tax law:
- US taxes on businesses are based on profits after expenses. The law generally gives wide discretion to businesses on what is considered an appropriate business expense. Under current law, the expenses incurred in moving one’s operations overseas fall into that category. They’re legitimate businesses expenses and may be deducted from revenue when calculating taxable profit.
- When a US business earns revenue overseas, the resulting profit should be taxable in the US, with an offset for whatever foreign taxes were paid. What actually happens is that, as long as the revenue and profits remain outside the US, the Federal government has no cognizance of them, and they remain exempt from US tax. Apple, for example, has billions of dollars overseas that it will not bring back to the US because it would be immediately taxed.
This latter opens up its own cans of worms:
- When a multinational business operates in the US, it may be able to rearrange its finances to that the profits from its US operations appear to have been earned elsewhere.
- If the money is ‘out there in the world’ and not subject to US tax, there are a galaxy of international tax-avoidance schemes by which it can be further hidden away.
I’m not sure what can be done to address these items. You could say that the expenses of moving one’s business abroad are not deductible. Indeed, President Obama proposed such a law, but it was defeated in the Senate. But how does the government distinguish between moving one’s business and expanding it? Alternately, rather than relocating its operations abroad, it could simply close its operations in the US and contract out to a foreign firm. (There are no Apple factories in China: Apple products are made by Chinese firms like Foxconn.)
I have even less clue as to what to do about the second issue. No politician could survive the wrath of Big Business for trying to collect taxes from US firms on foreign operations. And again, the businesses could rearrange themselves to maintain the exemption.
The only thing the US could do is to reduce taxes and hope that business stops playing tax games, figuring that it’s cheaper to simply pay up.
Yeah, right. It’s hard to be cheaper than zero.