WASHINGTON — APPLE got a big surprise last week when the European Commission ordered Ireland to collect more than $14 billion in back taxes from the company. The global giant had been attributing billions of dollars in profits to a phantom head office, allowing it to pay a tax rate of 1 percent or lower.
Both Apple and Ireland are appealing the decision, but the commission’s announcement was the latest sign that multinational corporations are running out of places to hide from paying taxes. The door is now open for Congress to fix our own corporate tax code, which has allowed the biggest multinationals to shirk their obligations for decades.
The Apple ruling is big, but it is only the latest international effort to end the deals that American multinationals have used to pay near-zero tax rates. The European Commission is investigating Luxembourg’s tax arrangements for Amazon and McDonald’s, and last year the European Court of Justice struck down tax advantages to companies and their subsidiaries selling e-books throughout Europe. Also last year, Britain enacted a new tax to target profits siphoned off by international companies — nicknamed, without much subtlety, the “Google tax.”
It’s not just Europe. The Organization for Economic Cooperation and Development and the Group of 20 nations are coordinating on a global effort to end the cross-border games that allow companies to avoid taxation by moving money among various subsidiaries. Multinational corporations are especially worried about losing access to Cayman Island-style tax rates in European countries where they can also get rule of law, political stability and an educated professional class of attorneys and consultants.
The Treasury Department has pushed back against the European Commission over the Apple case, concerned about the impact on the Internal Revenue Service’s authority. But Treasury has also finalized new country-by-country reporting requirements that could help expose the jaw-dropping variety of tax-dodging schemes multinational companies employ. At the Group of 20 summit meeting in China last weekend, President Obama reiterated his support for a cooperative global effort to end the international tax shell game.
Now that they are feeling the sting from foreign tax crackdowns, giant corporations and their Washington lobbyists are pressing Congress to cut them a new sweetheart deal here at home. But instead of bailing out the tax dodgers under the guise of tax reform, Congress should seize this moment to take three crucial steps to repair our broken corporate tax code.
First, Congress should increase the share of government revenue generated from taxes on big corporations — permanently. In the 1950s, corporations contributed about $3 out of every $10 in federal revenue. Today they contribute $1 out of every $10, despite their reliance on federal investments to start and expand their businesses. The National Science Foundation helped fund some of the initial work of Google’s founders. Apple’s consumer products still rely on technology that originated in federally funded research. To usher in the next generation of prosperous American companies — and to make the investments we need to sustain broad-based economic growth — the current generation of corporate winners must step up and pay its fair share.
Second, Congress should encourage investment in jobs here in the United States. Giant corporations are pushing corporate tax reform proposals that offer a lower permanent tax rate for earnings generated abroad than earnings generated at home. That is nuts. Preferential tax treatment, either through special rates or deferred due dates, creates a huge financial incentive for American companies to build businesses and create jobs abroad rather than in the United States. Our tax code should favor jobs and businesses at home — period.
Third, Congress should level the playing field for small businesses. Small companies in Massachusetts don’t stash profits in the Netherlands. They can’t hire a team of accountants to set up a “reverse hybrid mismatch” to slash their taxes. This puts small businesses at a competitive disadvantage as they end up shouldering more of the burden of paying for education, infrastructure, research, the military and everything else our nation relies on to succeed.
I have been pushing Congress to take these steps since I arrived in the Senate in 2013. The common refrain from Republicans who oppose these measures is that taking them would encourage American companies to flee abroad. But as other nations step up to prevent tax avoidance, that case gets weaker and weaker. And we have the leverage to tighten our tax code because these companies want what America offers: the world’s wealthiest consumers, the world’s best work force, the world’s most reliable legal system and the world’s deepest capital markets.
For years, corporate tax dodgers have taken full advantage of all the benefits of being American companies, while searching out every possible way to avoid paying American taxes. Now that other leading countries are starting to get tough on tax enforcement, these tax dodgers suddenly want to move their money back to the United States. When they do, they should pay their fair share, just as working families and small businesses have been all along.
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