Archaic Tax Rules Hit US Companies

Published in Financial Times

Sir, In your article “Apple, leverage and tax avoidance” (May 3) you rightfully point out the outdated international tax regime in the US and its consequences on how companies like Apple make decisions.

Under a worldwide tax system, such as the system under which US companies operate, valuable resources are devoted to tax planning rather than more productive activities. In addition, cash reserves are trapped outside the US (the so-called “lock-out” effect). These reserves could be used for investment, which would help stimulate anaemic US growth. In fact, this was one of the main reasons why Japan decided to reform its corporate tax system, lowering its corporate income tax rate (which, at the time, was the highest among the world’s developed countries) and switching to a territorial system. Following the switch in 2009, Japanese companies did indeed increase their repatriation of foreign earnings considerably (by 20 per cent in the first year).

A worldwide tax system coupled with a high corporate tax rate (now the highest among developed countries) is a direct impediment to US companies’ international competitiveness. The UK had the same concern and, as a result, in 2009 simultaneously lowered its corporate tax rate and made the switch to a territorial tax system. The change seemed to reverse or stop the flight of businesses from the UK. With the recent transitions in the UK and Japan, only six out of 34 countries in the Organisation for Economic Co-operation and Development still have worldwide tax systems. US companies are falling behind in the race and that is apparent from the decreasing share of US companies among Fortune 500 global companies.

There is also a real cost to the US Treasury in terms of forgone tax revenues created by this cash pile sitting overseas, as much as $30bn annually according to some estimates. It is time for the US to get serious and revise these archaic rules in a way that conforms to the realities of the new global economic system.

Pınar Çebi Wilber, Senior Economist, American Council for Capital Formation, Washington, DC, US