The Strategist

IMF experts advised the United States to improve the tax system

07/08/2016 - 15:05

If the United States want to combat under-reporting of taxes paid by large multinational companies, the country must reform its own tax system by switching to the territorial principle of taxation. Simultaneously, it is necessary to tighten the deductions policy and limit capital’s moving out. This is stated the IMF’s new report on a major reform of the country’s tax system. The changes offered by the IMF could lead to a revision of the corporate world and the tax system.

John Morgan via flickr
John Morgan via flickr
The US needs to reform the system of taxation of transnational corporations in order to improve tax collection. To do this, the government should equalize the tax burden on credit and investment finance, according to a new study published on the IMF website (Kimberly Clausing, Edward Kleinbard, Thornton Matheson). "Given the fact that the US is the largest importer and exporter of capital, such a reform could lead to a global revision of the international tax system", - the report’s authors say.The US Treasury is now preparing proposals for a tax system reform.

As the proportion of income derived from intangible assets is growing, their imposition is becoming more difficult. In 2012, 60% of multinationals revenues were obtained in jurisdictions with an effective corporate tax rate lower than 5%. At the same time, rates in the USA range from 15% to 35%, higher than the average in the OECD (23%). However, the actual tax burden estimated at 14% thanks to tax deductions.

The ratio of tax paid to the volume of operating profit (before depreciation) is comparable with other G7 countries - 13.2% against 13.3%. Reduction of the tax base contribute to postponement of payments from foreign offices of American companies (the "stuck" money are estimated at $ 2 trillion), as well as accelerated depreciation. In addition, ability to reduce the profit in the amount of interest paid on loans (and absence of such opportunity for dividends) leads to a distortion of capital allocation. This, in turn, creates a preference to companies with access to loan funds, as well as contributes to imbalances in the economy, note the researchers. 

Main proposal of the IMF experts is to reform the US tax system into a territorial regime. This step implies extension of the fiscal burden only on income and dividends received in the United States (now the American companies have to pay difference between the US tax rate and that of a jurisdiction where the income is received). To help transition to a new system intended introduction of a minimum (at 15%) tax profit earned in low-tax jurisdictions. In addition, the use of deduction should be limited geographically - the residues obtained in a high-stakes countries, should not be used for withdrawal of tax-free income, taxed at a lower rate.

The reform is proposing "economic rents" to equalize the tax burden on debt financing and equity. In particular, this means income in excess of the return rate, while reducing the tax rate to 25-28%. It is expected to align popularity of debt financing and investment assets - for example, by introducing deduction for investments similar to deduction of interest on loans. A similar system operates in Belgium, Italy, Austria, Brazil and Croatia, and is also used in certain industries (in particular, in the taxation of income from mining operations).