The tax plan creates a major new incentive for corporations to move – and create – jobs overseas. That’s because the plan permanently reduces the tax rate on corporations’ foreign income to about half their tax rate on income earned in the United States, or even lower in some cases. This permanent change will encourage companies, especially large multinational corporations, to outsource their existing operations and add new jobs overseas rather than in the United States. This doesn’t mean that companies will stop creating jobs in the U.S. – many certainly will – but it will tilt the playing field in favor of locating jobs overseas.
Shifting Jobs Overseas
For many years, major U.S. companies have shifted jobs and profits overseas to cut costs. Far from bringing those jobs back, the tax plan could accelerate that trend and put more U.S. jobs at risk of being outsourced. That’s because the plan creates a new system for taxing U.S. companies’ foreign profits. Under this system, profits earned overseas face a minimum tax rate of only 10.5 percent, which is half the tax rate for corporate profits earned in the United States. As a result, companies will have a major incentive to shift as many profits, investments, and jobs out of the U.S. as possible to take advantage of this lower tax rate and minimize their tax burden.
These effects could be especially pronounced in certain industries, such as manufacturing. In addition to the reduced foreign tax rate, the tax plan completely excludes foreign profits equal to 10 percent of a company’s “tangible” investments abroad from being taxed, investments like factories and equipment. Combined with the lower minimum tax rate, that means profits earned from manufacturing and other investments overseas could face essentially one-fourth the tax rate that they would face if they were located in the United States. That provides a major incentive for companies to shift existing operations and new investments overseas, putting U.S. jobs at risk – especially in industries like manufacturing that rely on tangible investments.
Encouraging Tax Havens
Large U.S. companies have consistently shifted profits to tax havens for many years by using accounting techniques that allow them to move the profits without changing their business operations. It has been financially advantageous for them to do so, because under the old tax law, companies were not taxed on profits earned overseas until they were repatriated to the United States. Companies avoided U.S. taxes by never technically repatriating those profits. The new tax plan continues to encourage this profit-shifting – and could potentially make the issue worse.
The 10.5 percent tax on foreign income is intended to ensure that companies exploiting tax havens pay at least some taxes, since if they pay below 10.5 percent in taxes to foreign governments, they will need to make up the difference by paying taxes to the United States. However, the minimum tax’s design may actually encourage companies to increase profit-shifting. That’s because the minimum tax is determined on a global basis, which means companies can average their foreign profits tax rates from different countries to see whether they owe the minimum tax.
This means, for example, that if a company builds a new factory in a country like Germany or France with a tax rate comparable to the U.S., then it will likely be able to avoid the minimum tax by shifting an equivalent amount of profits to a tax haven, like Bermuda, where it would pay zero taxes, since the company’s total foreign taxes would average about the minimum tax level. This gives companies that have moved jobs and operations overseas a new incentive to also shift as many profits as possible overseas. At the same time, if a company already takes advantage of tax havens, then, under the new tax plan, they will have a new major incentive to shift their jobs and operations overseas to be able to average out their foreign tax rate and avoid paying the minimum tax. Thus, the tax plan could cause companies to shift both more profits and more jobs offshore.
Permanent Preference for Overseas Income
The tax plan makes these corporate tax cuts and changes permanent, unlike the tax cuts for workers. That means companies will factor these tax preferences for overseas operations and income into their decisions about where to open new factories and locate their operations long-term. Companies will know that moving jobs and operations overseas will provide long-term tax benefits, even if they come at the expense of their American workers.