In today's world, big companies are often global companies -- which can create tax issues. Corporate tax avoidance is a concern of taxing authorities who want to make sure that businesses do not make strategic decisions on where to declare and keep income that deprives countries of needed revenue. Companies also need more certainty on tax laws across different jurisdictions, especially if there is a threat of retroactive penalties being imposed.
Just recently, for example, Apple was given a $14.5 billion retroactive tax bill, which the Wall Street Journal reports has been “broadly condemned by members of Congress, business leaders and tax professionals.” The bill came from the European Commission, which has begun imposing penalties retroactively based on a “new and expansive interpretation of state aid rules.”
Companies cannot and should not be subject to substantial retroactive penalties, especially as U.S. companies are heavily being targeted for investigations by the European Commission. Businesses need certainty in tax laws and corporate tax laws need to be reformed so they make sense for U.S. entities and no longer promote the practice of keeping money offshore to avoid burdensome costs.
The Need for Reform
U.S. corporations have more than $2 trillion in deferred overseas income, which is money that these companies should be able to spend on investing, growing and rewarding shareholders in the United States. America's business tax system encourages keeping this money offshore rather than investing it at home, and it needs to be reformed.
There have long been efforts at changing business tax rules to reduce the incentive to move money offshore, but the European Commission's latest actions in retroactively imposing taxes on Apple may create more bipartisan incentive to move forward with reforms.
The decision to apply retroactive penalties not only creates problems for business entities unexpectedly faced with substantial tax liability, but it also creates more problems for U.S. taxing authorities. The issue is that the actions threaten to erode the U.S. corporate tax base, as companies are able to claim credits against their tax bills in the United States for any tax payments which the companies make to member states of the European Union.
In broadening the interpretation of state aid rules which allowed the European Commission to go after Apple and impose this substantial retroactive penalty, the approach being taken may run contrary to well-established international taxing standards. U.S. multinational corporations don't typically do their research and development in European countries, so little of their income should be attributed to operations in the E.U. When member states try to tax this income just because it is not being repatriated (as they have done here), this creates a substantial loss of revenue for U.S. taxpayers.
Tax reform would help to eliminate this problem by removing the incentive for U.S.-based companies to park income overseas, thus creating this opportunity for the E.U. to impose tax liability.
Unless and until reform occurs, however, businesses will need to ensure they consult with a Virginia tax lawyer like Kevin Thorn to make sure they are in full compliance with the increasingly complex U.S. and international tax laws.
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