Thesis on "Corporate Taxation -- the Corporate Income"

Thesis 9 pages (3624 words) Sources: 7 Style: APA

[EXCERPT] . . . .

Corporate Taxation -- the Corporate Income Tax and the Issue of overseas profits

The corporate entity is a 'person 'in the eye of law, and thus is subject to income tax. The issue is two fold: One is that the tax in the U.S. On corporate income is so heavy -- 40% to be specific that multinationals and even small firms have made it a point to reincorporate in some other country and thus avoid taxes in the U.S. This has given rise to complications in the U.S. economy because jobs and investment thus are all shifted outside and the resultant depression has become acute. There is a lot of capital that was and is being invested outside because of the excessive income tax levied on corporations, and the second issue is that while turning a blind eye to the problem of the tax burden the government is now considering taxing the profits generated abroad. There have always been controversies with regard to the corporate income tax.

It was often been a great point of contention and the tax was always perceived both by individuals and corporate to be excessive. In fact this contention was proved correct by 2001 when the Bush administration declared a surplus of two hundred and eighty one billion surpluses. This was stated to be on account of the progressive tax structure. It was thus that Congress had halted progressive tax system by bringing out the 'Economic Growth and Tax Relief and Reconciliation Act of 2001.' (U.S. Dept of Treasury, 2009) This was speculated to decrease tax from 39.6 to 33%. At that time the market downswing was predicted and it was believed that the tax cut would help revive the economy. Now the government is moving to the consumption tax and thus has revived the individual taxation in a new cloak. (U.S. Dept of Treasury, 2009) This applies generally to taxes. In this paper we are concerned with the move to tax business profits overseas and consider the problem and impact on the economy. It is pointed out that the corporate tax from the time it was introduced was always the focus of dissent. Then what were the issues in corporate income tax?

Corporate Income tax

The fundamental history of the corporate income tax begins in 1909 by applying one percent tax on business. The problems and burdens caused made the companies shift base. (Edwards, 2003) Normally for the purpose of the corporate income tax, the accrual accounting method is used, which means that tax is made payable when the profit is earned and not when it is actually paid. Thus taxing capital gains on an accrual basis is not feasible. Since it is so, the tax is levied on all gains when realized. One fall out as can be seen in the Enron tax shelters is the fact that the income tax's short coming in the accrual and actual realization was used by Enron which received up-front payments for escaping the tax liability. The problem of tax was tackled by the corporate by resorting to devious means.

Whitaker (2005) shows how the 'Corporations' in U.S. were forced to use 2 types of accounts in making 'their financial statements.' One was for the 'investors' and another for 'IRS'. (Whitaker, 2005) Thus there arises an accounting gap that is created by the rules that permit companies to protect income earned from the 'tax authorities' and at the same time giving a different picture to the investors. In the 1990s, there was increased activity of this kind when firms looked for tax shelters from the excessive taxation at home. The corporate tax policies drove the corporations to find all and any type of tax shelters, including taking advantage of the loop holes in the accounting procedure. This happens when we find the law which is insistent on the tax of a transaction rather than the wide economic consequences. (Whitaker, 2005)

This is a result of excessive taxation policies. For example when the companies find that the taxes have made the venture unprofitable in spite of doing well in business the company then looks for a place from where it could save some of the profits from the taxman legally. One step was to find another country where the tax was either non-existent or so less that a comparative advantage could be obtained by deferring accruals abroad from the U.S. tax net. Thus corporate entities began to look for safe tax shelters abroad.

Simple nuances like moving the residence of the owners of the company from the United States to another may give relief to taxes to twenty percent in net profits. In the hypothetical example of one such move to Bermuda, Rahn (2004) shows the interesting difference where the company can increase production, hire more personnel and raise the stock value just by changing its legal head office. This shift will be seen by U.S. people as unpatriotic, but if the tax policies are such that the company's responsibilities to the stake holders are often diluted on account of excessive tax. The shift abroad always results in laying off workers of the company in the U.S. Thus companies are trying to get their incorporations in places where the tax burden is less. Politicians blame the joblessness on the companies leaving America but fail to point out that the tax burdens are excessive and are the main reason.

Thus we can agree with Edwards (2003) when he says that major financial and investment decisions are taken with a view to find tax shelters. This is exactly what Enron did and the Enron-style tax sheltering has become a major corporate tax scandal. The problems of overburden of corporate which make them find tax havens or those countries with low-tax jurisdictions are also affecting Wall Street. Edwards (2003) pointed out that when the issues surfaced for the first time in 2003, there were three flaws in the corporate tax structure. The first being the way the capitalized assets and capital gains and profits are taxed in the U.S. And which is made use of by alien countries in attracting investments with tax shelters. The second is the problem of, corporate debt and equity.

These problems along with overseas competition and lesser profitability for the U.S. enterprise in U.S. And on account of tax overseas, has made the insistence form business houses to lower or do away with unnaturally high corporate tax. The issue is not only the fact that the unusually high tax has driven away corporations from investing in the U.S. But the question is if taxing the profits of America-based company's profits abroad along with its total income correct. This question is to be answered not from the tax point-of-view or political view but from the angle of the corporation and its future in the economy and the market. Corporations and companies are the backbone of any capitalist economy and the taxes have to be in an alignment with its growth. So will taxing of profits earned abroad be justified?

Income from Abroad: Why not?

At present individual s who has earned income from abroad are taxed by the income tax laws. Thus the IRS has emphatically stated that the income arriving from abroad is being taxable. Thus all U.S. citizens and aliens in U.S. who receive income from abroad and though the IRS enquires in bank accounts at Liechtenstein received public notice, the IRS actually has investigative interests in accounts anywhere in the world. Thus an individual has to report their worldwide income in the U.S. tax return. The foreign bank accounts of any entity have to be declared under the 'Bank Secrecy Act' by 'Form TD F. 90-22.' (Lynch, 2008) Thus all promoters of off-shore tax avoidance schemes are under scrutiny of tax authorities and the present proposal is also to include corporate incomes from abroad as it accrues to a tax. If the income is repatriated to the U.S. then the normal tax is paid. The proposal is to tax all amounts parked abroad also. The amounts earned abroad will also be taxed by the authorities of the nations where the company does business outside the U.S.

Why go abroad?

The reason why there has been a rush to invest abroad is not far to seek. Today the United States has high 'corporate tax' and the United States imposes taxes on firms with the income earned from throughout the world. This anomaly is a very dampening factor and a major issue in the cause of companies that lay off people in the U.S. And shift from the U.S. An U.S. incorporated company has to pay corporate tax of thirty five percent and a further state tax of five percent and the total of forty percent on all its income including those from abroad. Thus in the same industry and activity the companies incorporated in France Canada, or Germany or even Sweden pay lesser taxes on profits from its domestic and foreign activities. More over the… READ MORE

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