U. S. Should Change to a Sales Factor Tax Apportionment (SFA) for Corporate Taxes
In 2016, Bill Parks, one of the members of the Coalition for a Prosperous America, recommended corporate tax reform at the federal level based on the Sales Factor Apportionment Framework. Mr. Parks is a retired finance professor and founder of NRS Inc., an Idaho-based paddle sports accessory maker. He asserted that "Tax reform proposals won't fix our broken corporate system… [because] they fail to fix the unfairness of domestic companies paying more tax than multinational enterprises in identical circumstances."
He explained that multinational enterprises (MNEs) can use cost accounting practices to transfer costs and profits within the company to achieve different goals. "Currently MNEs manipulate loopholes in our tax system to avoid paying U. S. taxes… MNEs can legitimately choose a cost that reduces or increases the profits of its subsidiaries in different countries. Because the United States is a relatively high-tax country, MNEs will choose the costs that minimize profits in the United States and maximize them in what are usually lower-tax countries."
Sales Factor Tax Apportionment is the bi-partisan tax reform legislation that states passed to address the problem of getting corporations to pay a fair share of taxes in their state. The solution was "apportionment" of corporate income taxes that is a share of taxes to be paid by a corporation to a state based on a particular formula. According to a Policy Brief by the Institute on Taxation and Economic Policy, all but the five states that don't have a corporate income tax (Nevada, South Dakota, Texas, Washington, and Wyoming) have adopted some type of formula for state apportionment of corporate taxes.
Mr. Parks has proposed that Sales Factor Tax Apportionment be implemented on a national basis to ensure that multinational corporations are paying their fair share of taxes. The way his plan would work is that the amount of corporate taxes that a multinational company would pay "would be determined solely on the percent of that company's world-wide sales made to U. S. customers. Foreign MNEs would also be taxed the same way on their U. S. income leveling the playing field between domestic firms and foreign and domestic MNEs."
For example, if a MNE's share of worldwide sales in the United States is 40%, then the company would pay taxes on 40% of its sales. Mr. Parks states that the advantages of his plan are:
- "Inversions [and transfer pricing] for tax purposes become pointless because the company would pay the same tax no matter what its base.
- It would encourage exports because all exports are fully excluded from corporate income tax.
- It simplifies the calculation for federal, state, and local taxes because the profit to be taxed by the U. S. is determined by a simple formula.
- Reduces or eliminates the tax incentives to locate jobs, factories, and corporate headquarters offshore, boosting employment and U. S. tax revenue.
- Ends the disguised income taxes which are actually royalty payments.
- Allow Congress to raise revenue without raising rates because it stops U. S. and foreign multinationals from being able to place their profits offshore to avoid U. S. taxes."
A couple of additional benefits listed at www.salesfactor.org are:
- "Removing the incentives for multinational corporations to leave their profits in off-shore tax havens.
- Maintaining Congress’ ability to lower rates and/or increase revenue."
Mr. Parks concludes that "Sales Factor Apportionment is simpler and more effective than our current system which attempts ─ and often fails ─ to tax the worldwide business activities of U. S. corporations. Because it is based on sales, not payroll or assets, it is a difficult system to game. Companies can easily move certain business operations and assets out of the U. S., but few, if any, would be willing to give up sales to the world's largest market."
The Board of the Directors of the Coalition for a Prosperous America chose to support Sales Factor Tax Apportionment and included the following in their testimony to the House Ways and Means Committee:
“The US corporate tax system harms America’s trade competitiveness, over taxes income from wages, under taxes consumption, and is bad at actually collecting what is owed. It also enables rampant base erosion through transferring profits to tax havens or countries with lower corporate tax rates. Full reform centered around destination based, border adjustment principles can result in an efficient, trade competitive, and largely tamper-proof tax system. SFA is a destination based profit tax. Pretax income is allocated to the US in proportion to the percentage of a company’s total sales in the U. S. Pre-tax income earned outside the US is not taxed. Tax rates can be lowered substantially while still meeting revenue targets.”