Time to reform US tax – not give amnesties

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There is an absurd paradox in US tax. It wisely taxes its citizens on their world wide income without consideration of whether they are resident in the US or not. Despite claims to the contrary, this clearly works well for the US – and those who say otherwise are amongst the easy to find “anti-tax” lobby in the US.

On the other hand it taxes its companies on a completely perverse territorial basis – so that profit earned outside the US is not taxed until remitted from abroad. It is very easy to see the tax avoidance opportunities this paradox creates.

Bush exploited this by allowing in – I think it was 2007 – US corporations to remit funds back to the US at a 5% tax rate for a one off boost in receipts – which did nothing for employment in the US, which was his supposed aim. Now the FT reports:

US multinational companies are clamouring for a tax holiday to repatriate billions of dollars “trapped” overseas but are being rebuffed by Barack Obama’s administration.

JPMorgan research estimates that 30-40 per cent of the almost $1,000bn in cash held by non-financial S&P 500 companies is in foreign jurisdictions.

The answer is very obvious: the US needs to reform its basis for determining tax residence for corporations – and tax them on their world wide income. As is obvious from this demand, any other option gives rise to abuse.

Which is exactly why the UK is wrong to be relaxing this approach.

On the other hand – the UK also needs to reform its basis for determining tax residence for companies. The rule based on the location of central management, focussing on the board meeting is absurd and so easily abused it is well over due for reform.