How Important Is Deferral to Multinationals?

How Important Is Deferral to Multinationals?

by Jeremy Scott

The U.S. tax system allows multinationals to effectively indefinitely defer taxes on profits earned by active foreign affiliates until that money is repatriated to the United States. Deferral as a cornerstone of tax policy dates from a compromise during the Kennedy administration and has long been viewed as a key element of the international tax regime. But the Senate Finance Committee doesn't think it's all that important. In a background paper released earlier this month, Finance said, "In general, changes in the timing of paying a tax do not impact financial income and, as a result, may not significantly affect business behavior."

This strange statement understates the importance of deferral and might show that the Senate, at least, is unprepared for the fight that would result from an attempt to repeal or limit multinationals' ability to avoid taxes on foreign profits. There's a reason that Tax Analysts' Amy Elliott referred to this as the scariest tax concept being peddled in Washington.

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If deferral of taxes wasn't that significant, there would be little incentive for businesses to keep profits earned by active foreign subsidiaries offshore. ... [H]owever, businesses do hoard cash overseas. The Finance Committee argues that because they must book tax on those profits for purposes of financial reporting, eliminating deferral would only affect cash tax rates, which aren't that important. It is very likely that taxwriters have this point wrong.

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Senate taxwriters are right to target deferral for elimination in tax reform. It produces inequities between domestic and multinational companies and is hard to justify with corporate receipts at an all-time low. But lawmakers need to be realistic about how difficult it will be to sell such a change to businesses and their lobbyists. Simply saying something is unimportant doesn't make it so.

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View Jeremy Scott's opinion in its entirety on the taxanalysts® Blog.

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