What does it mean to be an American company? This question has recently been posed by U.S. Trade Representative Ambassador Tai, who has questioned whether being headquartered in the U.S. is sufficient for a company to be considered American, or whether policymakers should also consider where companies pay taxes.
Her logic suggests that if a company is headquartered in the United States but primarily pays taxes to other governments due to its international footprint, then U.S. trade policy should focus less on protecting its interests. However, this thinking is flawed for several reasons.
Firstly, large companies headquartered in the U.S. pay the majority of their taxes to the U.S. government. Data collected by the Internal Revenue Service shows that U.S. companies with more than $850 million in revenue pay over 50 percent of their taxes to the U.S. government. In 2020, U.S. companies reported income tax paid on a cash basis of $311 billion in total, with $193 billion—or 62 percent—going to the U.S.
Secondly, U.S. negotiators have agreed to rules that will reduce the amount of taxes some multinationals will pay to the U.S. and increase the amount those companies pay abroad. Under President Biden, the U.S. has taken steps to have our multinationals pay fewer taxes in the U.S. and more taxes abroad. This year marks the beginning of a new global minimum tax, spearheaded by the OECD with support from the U.S. Treasury, to ensure multinational companies “pay their fair share.”
Thirdly, other countries are targeting U.S. companies with discriminatory policies and the U.S. approach to digital tax and trade will impact where U.S. companies owe taxes. By design, these taxes discriminate against large U.S. digital companies and increase the amount of taxes U.S. companies pay to other jurisdictions.
While it is important to consider what defines an American company from a tax perspective, it is equally important to acknowledge that U.S. multinational companies pay a significant share of their taxes to the U.S. government. If taxes paid to the United States is the chosen metric, then policies like the global minimum tax and digital services taxes run contrary to that.
A smarter approach is to continue building on the 2017 tax reforms, which significantly reduced incentives for inversions. By making some of its temporary features permanent, while also working to roll back the tariffs put in place under the previous administration, U.S. policymakers could help companies that started, grew, and have succeeded in America continue to do so here.
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