Emerging Policy
Active Financing Exception/ CFC Look-Through-Rule Regulations
Late last year, Congress renewed a collection of about 50 temporary tax breaks, called “tax extenders, every two years for several decades. Negotiated in tandem with December’s omnibus spending bill, congressional leaders proposed the tax extenders to stimulate the economy, encourage business investment, and provide research credit. However, many of the extenders are of questionable merit. But, more importantly, they place small businesses at a competitive disadvantage.
Among the most egregious of extenders are the Active Financing Exception which allows multinational corporations to avoid tax on their income by making it look like their profit is generated in offshore subsidiaries, and the Controlled Foreign Corporation (CFC) Look-Through Rule, which allows multinational corporations to designate income as being earned in a low-tax country. Put plainly, these extenders incentivize companies to avoid taxes on profits generated in the United States by making it appear as if those profits were generated overseas.
These tax loopholes are a considerable drain on the U.S. economy. The Active Financing Exception is primarily responsible for why General Electric paid a federal effective tax rate of negative 11.1 percent between 2008 and 2012, receiving refunds in the billions. While the Joint Committee on Taxation estimates that the CFC Look-Through Rule would reduce revenues by about $21.8 billion over the 2016-2025 period. These figures levy a broader public cost aside from their sheer financial magnitude. Lost tax revenue bring about changes to public spending priorities as well as increase the federal deficit.
Despite their substantial price tag, Congress permanently enshrined the Active Financing Exception into law and extended the CFC Look-Through Rule for another five years as part of the omnibus spending deal.
These two tax loopholes benefit multinational corporations at the expense of small business. Multinational corporations are permitted to thrive off of American infrastructure, economy, and education, while, at the same time, failing to contribute their fair share in taxes. A 2014 report by U.S. Public Interest Research Group found that 82 of the 100 largest publicly traded U.S. companies diverted revenue offshore to avoid taxes. Small businesses, in turn, are proud to pay taxes and invest in their communities. However, this commitment to domestic investment should not be at the expense of multinational corporations. Pennsylvania small businesses would need to pay an average of $4,217 in additional taxes in order to make up the difference in government revenue lost by tax avoidance.
Businesses should compete on the provision of goods and services, not their ability to hire special interest lobbyist. For this reason, the small business community has shown such strong support for measures to close offshore tax loopholes. Sixty-four percent of small business owners support ending the ability of corporations to defer paying U.S. taxes indefinitely on income diverted overseas, according to a 2013 poll conducted by the Main Street Alliance and American Sustainable Business Council.
What you need to know about this emerging policy
For small businesses, where employees often work long hours and are earning more than $455 per week, the proposed rule could be significant. If multiple employees are routinely working beyond normal work hours, overtime pay could reasonably increase personnel expenses.
The Good Economist 11
What dO you need to know about this emerging policy
The Active Financing Exception and CFC Look-Through Rule are tax extenders that incentivize companies to avoid taxes on profits generated in the United States by making it appear as if those profits were generated overseas.
The omnibus spending bill passed in December enshrined the Active Financing Exception into law and extended the CFC Look-Through Rule for another five years
Sixty-four percent of small business owners support ending the ability of corporations to defer paying U.S. taxes indefinitely on income diverted overseas.