Congressional Report Reopens Debate On Taxation Of US Firms' Foreign Profits

by Leroy Baker, Tax-News.com, New York

06 May 2004

As attention remains focused on the amount of taxes paid by US corporations, a new estimate by a Congressional tax committee has suggested that the tax code relating to the foreign profits of US firms gives more in tax breaks than the government receives in revenue.

According to the report by the Joint Committee on Taxation, a non-partisan arm of Congress, the regulations governing the taxation of foreign profits contain so many tax breaks and credits that can be claimed by US firms, that it suggests the Treasury would collect $6 billion more in revenues each year if it dropped the system altogether.

The committee’s findings are likely to further fuel the debate as to whether the United States should turn more towards a territorial system of taxation, whereby the government only taxes profits made within the country’s boundaries. By switching to this system, the committee estimated that the US government would reap at least $60 billion more over ten years than it currently does from the taxing of profits made overseas.

Critics of the current system contend that certain provisions, including a rule allowing US firms to defer paying tax on overseas earnings until they are repatriated, encourages corporations to keep large amounts of money offshore in low tax jurisdictions.

They also point to expense provisions allowing US firms to deduct many expenses from income. However, supporters of the current system argue that the latter provision can often lead to firms paying more tax as deductions can reduce tax credits.

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