Tax

U.S. and European Tax Authorities Look at U.S. Corporate Profits Overseas

By Nathan Shi, J.D. Candidate 2019 | Posted on

Republicans in Congress have released an outline of their plan to rewrite the tax code. A recent episode of NPR’s Planet Money explains that a centerpiece of the Republican plan is to drastically reduce corporate taxation, lowering the rate to twenty percent. Currently, the corporate tax rate in the U.S. is thirty-five percent, one of the highest in the world. But, there are various exceptions in the tax code that allow many Corporations to be taxed at about a little over twenty percent; a comparable rate to the rest of the world.

One of the most prominent exceptions allows companies to avoid taxation on profit earned outside of the U.S. so long as it remains outside of the U.S. Many U.S. companies take advantage of this through foreign subsidiaries that manage their international profits. In fact, seventy-three percent of Fortune 500 companies operate one or more subsidiaries in tax haven countries such as Luxembourg or the Cayman Islands, where corporate income tax rates are much lower. This amounts to trillions in U.S. corporations’ profits sitting untaxed overseas.

A recent case brought a glimmer of hope for those in Congress wanting to see money from overseas flow back into the U.S. economy. The IRS sued Amazon for roughly $1.5 billion, but ultimately, Amazon prevailed. In hopes of seeing money move to the U.S., President Trump called for tax reform including a one-time tax cut. Trump’s plan would slash the corporate tax rate to twenty percent and eliminate many existing exceptions. He believes that money saved could be used to hire more American workers. But, the President may face competition for subsidiaries’ money from where it is already piling up: Europe.

European countries themselves have been cracking down on this issue as well. This has resulted in a race to the bottom, with governments lowering taxes to try to lure corporations to their countries. Although European rulings may result in the U.S. missing out on huge sources of revenue, it could potentially aid the President’s efforts. The more difficult it becomes for companies to keep profits abroad, the more likely they may be to return that money to the U.S. Ultimately, Congress and the President’s ambitions have many challenges ahead of them. But, if their plan works, the U.S. may see trillions of dollars return to its shores.

U.S. and European Tax Authorities Look at U.S. Corporate Profits Overseas (PDF)

Trump’s 2005 Tax Return Released: Why President Trump Wants to Abolish the A.M.T.

By John Billet, L.L.M Candidate, 2017 | Posted on

On March 14, MSNBC released a two-page section of President Trump’s tax return from 2005. The released tax return (which was condemned but confirmed by the White House) shows that Mr. Trump reported income of $150 million and paid $38 million in federal income taxes (an effective tax rate of 25 percent). President Trump declared more than $100 million in business losses which led him to save millions of dollars in federal taxes.

During the campaign, Trump was highly criticized for refusing to release his tax returns to the public — a tradition for presidential candidates. Indeed, critics claimed that his tax returns could unveil potential improprieties within his business practices, as well as reveal whether he has done business with Russian companies and banks. In his defense, Trump claimed he was under an ongoing audit by the IRS, which prohibited him from releasing his tax returns (although commentators have said that an audit would not legally preclude him from releasing them).

In a recent statement, the White House explained that the business losses were a “large scale depreciation for construction.” The White House also said, “Before being elected, Mr. Trump was one of the most successful businessmen in the world, with a responsibility to his company, his family and his employees to pay no more tax than legally required” and that he paid “tens of millions of dollars in other taxes, such as sales and excise taxes and employment taxes, and this illegally published return proves just that.”

Trump’s 2005 tax return does not indicate any ties with Russia, nor does it shed light on any business activities that were not previously known.  However, it highlights that Trump paid his tax under the alternative minimum tax, which Mr. Trump wants to abolish.

The alternative minimum tax (A.M.T.) was created to prevent wealthy Americans from paying no income tax by taking advantage of deductions and loopholes. Indeed, with the A.M.T., those with high incomes have to calculate their taxes twice: once with all their deductions and once without many of them. The taxpayer must then pay the higher of the two figures. As a matter of fact, without the A.M.T., Trump would only have paid $5.3 million federal income taxes in place of the $31 million he paid on $153 million in income in 2005. According to David Cay Johnston, the journalist who received the tax return by mail and Pulitzer laureate, “If we didn’t have the alternative minimum tax, he would have paid taxes at a lower rate than the poor who make less than $33,000 a year.”

President Trump condemned MSNBC’s release of his 2005 tax return, calling it “fake news” and criticizing the media on his Twitter page. Putting aside the debate of whether the tax return is fake, the partial disclosure of Trump’s tax return will further pressure the White House to finally publish the President’s tax return in full.

Trump’s 2005 Tax Return Released Why President Trump Wants to Abolish the A.M.T. (PDF)

The Disparate Impacts of Trump’s Proposed Tax Law Reform

By Sheila Tabrizi, J.D. Candidate 2019 | Posted on

President-elect Donald Trump’s tax plan, if passed by Congress, is predicted to help the rich get richer while the poor get poorer. Trump’s plan to reduce overall taxes will have the likely effect of keeping money in the hands of the 1 percent of American households, creating family “dynasties” and providing corporations with large tax cuts, while generating less income for the government and the poor.

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Anti-Inversion Regulations Announced

By Hector Ramirez-Pardo, LL.M. Candidate 2017 | Posted on

In the last week of September, the U.S. Treasury submitted proposed regulations to the White House Office of Management and Budget to prevent U.S. companies from engaging in so-called “earning stripping”. This practice consists of a foreign controlled-domestic company making loans to its U.S. subsidiary with purposes of accruing deductible interests from its overall earnings. In so doing, the U.S. entity creates a tax expense that reduces its income tax base and shifts its earnings overseas.

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Recap: “Innovating for Social Impact”

By Olivia Poppens, J.D. Candidate 2019 | Posted on

On October 3, the Berkeley Center for Law, Business and the Economy (BCLBE) held a speaker series entitled “Innovating for Social Impact.” The center welcomed three leading attorneys in social entrepreneurship and nonprofit legal strategy: Joel Beck-Coon, Nancy McGlamery and Will Fitzpatrick.

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Trump Uses Tax Code as a Shelter for Nearly 20 Years

By Camila Piedrahita Abello, J.D. Candidate | Posted on

On October 1, 2016, The New York Times released three pages of Donald Trump’s 1995 tax returns. These documents show that Mr. Trump claimed a $916 million loss that could have protected him from paying any federal or New York State income taxes for the last 18 years.
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EU to Create Tax Blacklist Following Panama Paper Leaks

By Vinh-Khoi Le, J.D. Candidate 2016 | Posted on

In the wake of the Panama Paper leaks, European Union tax commissioner Pierre Moscovici urged states to draft a blacklist of countries that serve as tax havens to thousands of companies. EU states agreed to this move on April 22, 2016, and plan to complete the list by the end of the summer. Finance ministers have also agreed to automatically exchange information on certain beneficial company owners.

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US Country-by-Country Reporting Rules Expected to Finalize Early

By Vinh-Khoi Le, J.D. Candidate 2016 | Posted on

Robert Stack, Deputy Assistant Secretary for International Tax Affairs in the US Treasury Department, said that the country expects to finalize its rules on country-by-country reporting by June 30. This is a full six months earlier than expected under the proposed rules (REG-109822-15). The reason for the regulation’s expedited finalization is that companies meeting threshold level of sales would thereafter be required to file a country-by-country report with their tax return “for all tax years that begin after that date, including years beginning on July 1, 2016, and September 1, 2016.” This follows the OECD’s Base Erosion and Profit Shifting (BEPS) initiative to push for global country-by-country reporting initiatives, among other international tax reforms, to increase transparency. Finalized on October 5, 2015, the discussion on country-by-country reporting (Action 13) can be found here. The sooner the US regulations are finalized, the sooner the initiative can be implemented.

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Earning Stripping, Tax Inversions, and the Gaming of America’s Corporate Tax System

By Kristofer Hatch J.D. Candidate 2017 | Posted on

Earning stripping and tax inversions are allowing US-based corporations to shelter their tax burdens outside of the reach of the IRS. In an inversion, a US-based company relocates their corporate headquarters overseas, allowing them to lower their domestic tax bill. A key element of this scheme is earning stripping. Earning stripping works by having a company complete their inversion deal, moving their headquarters outside of the US for tax purposes, while retaining their operations within the US. The US subsidiary then borrows large amounts of money from the foreign parent. The US subsidiary can then use the interest payments they make for the foreign parent to offset the American earnings, thus lowering the amount they are taxed domestically.

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Johnson Controls among the First Tax Inverters of 2016

By Claire Oxford, J.D. Candidate 2018 | Posted on

In one of the first big mergers of the year, Milwaukee-based Johnson Controls will combine with Tyco and move their corporate domicile abroad to Cork, Ireland. The move will save Johnson Controls an estimated $150 million in taxes per year.

Johnson Controls is not the first American company to seek a tax haven abroad. This move is known as “tax inversion,” which is when a company moves its corporate headquarters to a low-income-tax country while continuing its material operations in its original country. Since 1982, an estimated 51 U.S. companies have reincorporated in low-tax countries abroad.

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