Question

Invariably, every election year the topic of tax gets brought back into focus and how best to stimulate the economy. On one side, you have reduction in corporate taxes to flow more earnings to employees. On the other side, you have higher corporate taxes to pay their fair share. The textbook opens up this chapter discussing a specific tax avoidance strategy for corporations. Trump successfully passed the Tax Cuts and Job Acts that included a "Base Erosion and Anti-avoidance Tax" set to mitigate this. How does that act accomplish this and what are the implications to US companies with foreign operations?

Answer 1

Answer --   President Trump signed the Tax Cuts and Jobs Act (TCJA) into law on Dec. 22., 2017, bringing sweeping changes to the tax code. How people feel about the $1.5+ trillion overhauls depend largely on their opinion of Trump's presidency. Individually, how the changes were felt depended on factors like income level, filing status, and deductions. Those living in a high-tax state with soaring property values may have paid more in taxes in 2019.

• The Tax Cuts and Jobs Act was the largest overhaul of the tax code in three decades.
• The law creates a single corporate tax rate of 21%.
• Many of the tax benefits set up to help individuals and families will expire in 2025.
• The Tax Cuts and Jobs Act of 2017 made several significant changes to the individual income tax, including reforms to itemized deductions and the alternative minimum tax, an expanded standard deduction and child tax credit, and lower marginal tax rates across brackets.
• These changes simplify the individual income tax for millions of households, as 28.5 million filers would be better off taking the newly expanded standard deduction, instead of itemizing various deductions, reducing compliance costs.

Over the past several decades, US multinational corporations have used a variety of techniques to shift profit from the United States to other countries (and, thereby, have eroded the US tax base). A US-based multinational corporation might, for example, pay an affiliate in a lower-taxed country to use patents or other intellectual property in the United States. This would increase the US corporation’s costs, thus reducing their reported profits in the United States and increasing their revenue and their reported profits in the lower-taxed country, potentially lowering the corporation’s overall tax bill. Prior US tax laws attempted to limit profit shifting, mainly by regulating what are called transfer prices between companies, but the Internal Revenue Service struggled to enforce these laws effectively.

The BEAT, a new tax under the Tax Cuts and Jobs Act, limits the ability of multinational corporations to shift profits from the United States by making deductible payments to their affiliates in low-tax countries.