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Thursday, March 7, 2013

Tax policies for multijurisdictional income

On March 1, the SJSU MST Program, Santa Clara Valley TEI chapter and the Tax Policy Committee of the California Bar Taxation Section held their 3rd annual Tax Policy Conference. The theme - Tax Policies for Multijurisdictional Income.  This is a hot topic at both the international and national levels. Presenter materials are available here - but they can't replace the excellent presentations and ideas that were presented and discussed.

A few observations from the day's presentations:
  • Despite occasional calls for formula apportionment at the international level, it likely would not work. It would be more difficult to get all countries to agree on this approach than it has been for the U.S. states. The diversity of economies and needs of developed versus even emerging countries are too great to think that a consensus approach can be reached. Transfer pricing will likely remain the standard, although countries may tighten the rules.
  • There will be challenges in creating a territorial system in the U.S. In addition to politics of reaching a consensus, there is the issue of revenue neutrality and whether it is wise to employ a system different from other industrialized countries that tend to use a dividend exemption approach.
  • Focus of governments will continue to be on taxing intangibles.
  • The Mayo decision of the US Supreme Court likely gives the IRS greater authority on how it writes transfer pricing rules.
  • The OECD BEPS (Base Erosion and Profit Shifting) report issued earlier this year should be reviewed.
  • Many factors play a role in how multistate income is apportioned among states - nexus, sourcing, throwback, apportionment factors, and reporting system (combined/unitary or separate).
  • Given the numerous complexities in apportioning multistate income in some economically or accounting-wise justifiable manner and the relatively low amount of tax it generates, perhaps states should just repeal their corporate income taxes. 
And economist Jon Haveman helped provide a broader picture of the economy in which tax reform would take place, should any significant changes actually occur. He noted that sequestration will hurt the economy for some time and that failure to adequately invest in infrastructure will hurt our economy for years.  That is all important to consider because reasons why Congress is exploring a more to a territorial tax system and a lower corporate tax rate is to improve competitiveness of US firms and to help the economy. But overlooking other big influences on the economy might limit the possible gains from reform.

What do you think?

Information on other conferences of the SJSU MST Program -

1 comment:

Unknown said...

Although I support a territorial system in general because it makes the U.S. a more attractive place for multinational business, territorial system still has some disadvantages. One of them is that it would risk a higher tax on small businesses which don’t have any foreign businesses. The creation of small business is the base of our economy. If a territorial system adopted, big businesses which have foreign businesses will try to avoid paying U.S. tax. This is a disadvantage for some start-up business which might have big potentials to boom.