Repealing Check-the-Box
Top item in Obama's multinational tax proposal
By Kaye A. Thomas
Posted May 5, 2009
Pretending a subsidiary doesn't exist.
President Obama has proposed an overhaul of certain rules governing the taxation of multinational corporations. In essence, these changes eliminate loopholes: legal ways to pay tax based on a fiction of some kind. Here's a look at just one proposal that's estimated to collect some $90 billion over the next 10 years.
The association rules
First, a little background. Having committed no crime more serious than attending law school, I was sentenced to 20 year's hard labor as a tax lawyer. Prior to my parole in 2000 I spent many cheerless billable hours dealing with a set of regulations known in the trade as the association rules. The point of these rules was to distinguish between business entities that should be treated as corporations and those that should not.
Actually, though, in relation to businesses operating in the United States these rules served no meaningful purpose apart from helping people like me pay their bills. With minor technical adjustments in the legal documentation we could create a structure that would allow the promoter of just about any limited partnership or limited liability company to assure prospective investors that the venture would escape the dreaded grasp of the corporate income tax. The work was mind-numbing, to me at least, not because it was particularly complicated but because it served no purpose apart from compliance with a largely arbitrary set of rules.
Check the box
Relief arrived in the form of a new set of regulations that allowed the owners of certain types of business entities to simply choose whether they would be taxed as corporations. These are known as the check-the-box rules, because they make it possible to choose which set of tax rules would apply the same way you choose whether to have $3 of your federal income tax paid to the presidential election campaign fund, by putting a checkmark in the appropriate box.
To the best of my knowledge, the main impact of this change on businesses operating solely in the United States was to eliminate some expensive paperwork. Yet the new regulations were a huge boon to multinational corporations. We have special rules to prevent tax avoidance through the use of entities known as controlled foreign corporations. The check-the-box rules make it possible to create a CFC but pretend it doesn't exist. The Obama proposal would prevent multinationals from using the check-the-box rules in this manner.
The debate
Multinational corporations have a lot of political clout, so we can expect fierce opposition to the Obama proposal. Here are some of the arguments we're already hearing:
- Opponents say we shouldn't raise taxes on businesses in tough economic times. Proponents point out that the proposal is to take effect in 2011, giving plenty of time for recovery from the current downturn.
- Opponents say the proposal will encourage businesses to relocate outside the United States. Proponents say the proposal is specifically designed to eliminate perverse incentives for U.S.-based corporations to operate elsewhere.
It's of utmost importance for opponents to divert attention from the underlying reality. The Obama proposal doesn't impose any new tax, nor does it eliminate any tax benefit that was intentionally conferred on multinational corporations. It closes loopholes that allow these businesses to pretend subsidiaries don't exist, or pretend they have less income than they have, and to shift a portion of their tax burden onto the rest of us. It will be unfortunate if this initiative fails.
