There was a surprising moment of levity at a recent Senate Finance Committee hearing. And it came in the midst of a rather dry discussion on U.S. tax policy. In an exchange focused on obscure provisions of the 2017 Tax Cuts and Jobs Act (TCJA), Sen. Tom Carper (D-DE) asked, “Should the beat go on?”
Carper was in fact, asking a legitimate question. In this case, he was referring to “BEAT”—the Border Erosion Anti-Abuse Tax. Carper was wondering about the BEAT provision included in the 2017 tax legislation—why it had failed, and how to fix it.
In the same hearing, Treasury Department Deputy Assistant Secretary Kimberly Clausing explained the BEAT provision was intended to address foreign companies that invest in the United States. Such investment often takes the form of a foreign multinational buying a company or property located in the U.S. However, when many of these multinationals buy U.S. assets, they subsequently claim the resulting profits shouldn’t be taxed by the U.S. Treasury. Instead, thanks to current tax law, they simply claim residence in offshore tax havens and take their ample profits overseas. That allows them to avoid paying U.S. taxes—and leaves the Treasury holding an empty bag.
The BEAT tax provision was initially conceived as a means to tackle such profit shifting. But because it only applies in complex and extreme cases, it has failed to raise the revenues that were expected. That’s why Carper was right to question whether BEAT should continue to be a part of the corporate tax code.
U.S. manufacturers have been struggling with the COVID-19 pandemic for more than a year, and Carper wisely noted BEAT’s failure has hurt hard-working American companies. Essentially, BEAT has ended up neutralizing tax benefits that might have rewarded these domestic producers, and has instead ended up incentivizing more companies to actually move production offshore.
Realistically, BEAT has failed because, at its core, it’s too complicated—and requires a team of tax specialists. But that also points to a wider problem in America’s corporate tax code—that U.S. tax law simply contains too many incentives encouraging multinational companies to shift profits out of the United States.
What’s needed is for Congress to finally acknowledge this fundamental problem, and redesign America’s tax code to eliminate the tax advantages enjoyed by foreign multinationals.
The answer is fairly simple. And as Congress considers sweeping infrastructure and stimulus legislation, there’s clearly a window of opportunity to extend fresh, new thinking to such thorny issues as equitable taxation.
The American people would agree that it’s unfair for multinational firms to sell products in the U.S. market and then pay little or no federal taxes on the resulting profits. In particular, it makes little sense at a time when the Treasury is recording record deficits—and U.S. firms are already carrying a considerable tax load.
The answer is to tax foreign multinational corporations based on their sales in the United States. If a company generates $1 billion of profit on its U.S. sales, then it should pay corporate taxes on that $1 billion. Congress should no longer allow multinationals to employ convoluted profit calculations—or claim residence in an obscure, offshore location—as a means to skirt U.S. tax obligations.
Such an approach is commonly referred to as “Sales Factor Apportionment.” It’s an alternative that should replace the BEAT tax provision in order to finally tackle the profit-shifting that foreign companies currently enjoy.
Carper asked the right question in the recent Senate hearing. The answer is “no”—the BEAT should not go on. At present, the BEAT is enabling hefty tax avoidance schemes for foreign companies. That’s not fair to hard-working U.S. companies. And it’s short-changing the Treasury at a time of massive deficits. Congress needs to make sure that, as tax discussions continue, the goal will be to close tax loopholes that currently favor multinational corporations over domestic companies.