My company, Revere Copper Products, was founded in 1801 by Paul Revere. During the past few decades, I have watched this nation’s domestic manufacturers struggle against subsidized competition from overseas, particularly from multinational firms that have little attachment to supporting a vibrant American middle class.
One of the key problems U.S. manufacturers face is that America’s tax code is fundamentally flawed. Simply put, the tax system allows multinational enterprises (MNEs) to avoid paying many of the same taxes faced by domestic producers. Since Washington is currently considering a wide array of options for tax reform, addressing this disparity could help domestic U.S. companies compete on a more level playing field with their global counterparts.
Currently, taxes are only assessed on MNEs when their income is brought into the United States. But much of their profits are actually siphoned off along the way, thanks to a deliberate chain of financing and logistical stopovers in low-tax countries. And so, even when final sales take place in the lucrative U.S. market, MNEs are able to bank much of their profit piecemeal along the way in tax haven countries.
In contrast, domestic U.S. firms are required to pay taxes on all of their worldwide income. The result is that MNEs retain far more of their earnings, giving them a significant leg up in the global arena.
We hear often of the unfair nature of tax havens. In fact, the actual practice is fairly striking, in that MNEs brazenly establish distinct entities to redistribute their tax liability. For example, an MNE may manufacture their product in one country, but then apportion the product’s financing to a second country, with the insurance contracted in yet a third country and the shipping in a fourth. These various countries, which maintain notably low tax rates, are then able to claim portions of the overall income.
Such shell games are a rather obvious ploy to avoid corporate taxes. But the key point is that, no matter the intermediate steps, the product is still being sold in the U.S. Significantly, the United States is the world’s major consumer market, with thousands of MNEs benefiting greatly from access to such robust sales opportunities. It is only fair, then, that these companies should finally pay their fair share in return for such steady access.
The sums of money being shifted away from tax liability are stunning, too. In 2016, it is estimated that profit-shifting through tax havens reduced U.S. corporate taxes by $134 billion. At the same time, instituting this proposal will allow for a reduction of the overall corporate tax rate, down from 35 percent to roughly 26 percent, making it revenue-neutral.
To address these glaring inequities, many are now urging the adoption of a “Sales Factor Apportionment” (SFA) system. Such a “destination-based” approach would impose taxes based entirely on the country in which final sale of a good or service took place, without allowing for any intermediary or subsidiary entities. Essentially, U.S. taxes would be assessed solely according to the percent of a corporation’s annual sales generated in the U.S. market. This would negate the ability of MNEs to hide income via way stations in tax haven countries.
The Coalition for a Prosperous America (CPA) has estimated that an SFA tax system could generate an extra $1 trillion in tax revenue over the next decade. The burden of these taxes would fall on MNEs that currently evade U.S. taxes, not domestic companies. And in a further benefit, domestic producers would not be taxed on sales outside of the U.S. market — a significant step toward making them more globally competitive.
It is time for multinational firms to finally pay their fair share of the U.S. tax burden. It is the necessary price for entering the U.S. market. And it would help domestic American companies like mine compete on more equitable terms with multinational corporations — an effort that is long overdue.
Brian O’Shaughnessy is the chairman of Revere Copper Products, headquartered in Rome, New York.
Brian O’Shaughnessy
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