House Republican Budget Calls for 25% Top Individual and Corporate Tax Rate

Peek into the future: you can read The House Budget Committee Chairman’s budget recommendations for 2012. Check out the main tax points below, or download the full PDF (Path to Prosperity: Restoring America's Promise) here.

Individual tax reform: The current code for individuals is too complicated, with high marginal rates that discourage growth. This budget embraces the widely acknowledged principles of pro-growth tax reform by proposing to consolidate tax brackets and lowers tax rates, with a top rate of 25 percent, clearing out the burdensome tangle of loopholes that distort economic activity.

Corporate tax reform: American businesses labor under the highest corporate income tax in the developed world. The perverse incentives created by the corporate income tax do a lot of damage, yet the tax itself raises relatively little revenue. This budget improves incentives for job creators to work, invest, and innovate in the United States by lowering the corporate rate from 35 percent to a much more competitive 25 percent.

Hat Tip: TaxProf Blog

For Many Companies, Low Taxes Are Key To Profits

From NPR.org:

During his State of the Union address, President Obama said the current tax system is broken.

"Those with accountants or lawyers to work the system can end up paying no taxes at all," he said. "But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change."

Just how broken is the corporate tax system? Consider the tax rate paid by two of America's biggest companies — Wal-Mart and General Electric. Wal-Mart paid 34 cents in taxes for every dollar of profit it made in the past three years. General Electric paid just 3.6 cents on the dollar.

Welcome to the mysterious world of the corporate income tax, says tax expert Len Burman at Syracuse University. "There are big companies that consider their tax departments to be profit centers," he says.

That's right; instead of concentrating on making light bulbs, power plants or whatnot, companies use the tax system to boost their profits.

Continue reading at NPR.org...

Momentum Builds for Corporate Tax Overhaul

From the Wall Street Journal:

The White House and congressional Republicans are moving from different directions toward a consensus that the U.S. corporate tax code needs a fundamental overhaul, a goal high on corporate leaders' agenda.

Specific proposals for retooling the complex corporate-tax system aren't on the table and the debate over the issue is sure to be lengthy and difficult. But President Barack Obama and Republican congressional leaders are separately sounding the same broad theme that corporate tax rates should be lower.

"Tax reform could be a significant boost to our competitiveness," Rep. Eric Cantor (R., Va.), the new House majority leader, said this week. "I'm hopeful and expect the president to put some action behind his statements."

The movement on the corporate-tax issue comes as Mr. Obama and his aides are pushing a broad effort to repair relations with U.S. business leaders. Since Democrats lost control of the House in November, Mr. Obama has met with chief executives to solicit their ideas on job growth, negotiated a free-trade pact with South Korea widely supported by business, and begun searching for figures with strong ties to the business world to take top White House jobs.

The White House is also advancing a rapprochement with the U.S. Chamber of Commerce, the capital's biggest, richest business lobby, which has clashed repeatedly with the administration on a range of issues. On Wednesday, the White House said Mr. Obama would address members of the chamber for the first time at the group's Washington headquarters on Feb. 7.

Continue reading here...

California's Business Tax Burden No Heavier than Average

Although my home state of California is often scrutinized for it's heavy corporate tax rate, according to this article from LA Times.com, the burden is no heavier than the national average. In fact, California takes an estimated 4.7% of what businesses produce in taxes, which is the exact same as the national average.

The government take is higher in Alaska (13.8%), New York (5.5%) and Florida (5.3%). Even Texas, known for rolling out the red carpet for business, pocketed more than California — 4.9%.

That's according to an annual study of the tax burdens in all 50 states by the Council on State Taxation, a business-friendly group led by senior executives of Chevron Corp., General Electric Co. and other major corporations.

"California is pretty middle-of-the-pack when it comes to business taxes," said Joseph R. Crosby, the organization's senior director of policy.

Although the state's corporate income tax rate — 8.84% — is among the higher in the nation, its bite is diminished by various tax credits and other measures that have been adopted over the years, including:

• One of the most generous research-and-development tax credits in the nation, allowing businesses to deduct 15% of the amount they increase their R&D funding over a base level. The national median is 6.5%, according to Yonghong Wu of the University of Illinois at Chicago.

• Proposition 13, the 1978 initiative that limits property tax increases to 1% a year until properties are sold, when they are reassessed at the market value. This has slowly shifted the property tax burden from businesses to homeowners, since commercial real estate changes hands less often than residential.

Continue reading at LA Times.com...

The Tax Haven That's Saving Google Billions

New reports have emerged regarding the complicated international business structure to keep its corporate tax rate at a super low 2.4%. The search giant takes advantage of generous laws in countries including Ireland, the Netherlands, and Bermuda to save on their tax bill.

Business Week.com reports:

The heart of Google's (GOOG) international operations is a silvery glass office building in central Dublin, a block from the city's Grand Canal. In 2009 the office, which houses roughly 2,000 Google employees, was credited with 88 percent of the search juggernaut's $12.5 billion in sales outside the U.S. Most of the profits, however, went to the tax haven of Bermuda.

To reduce its overseas tax bill, Google uses a complicated legal structure that has saved it $3.1 billion since 2007 and boosted last year's overall earnings by 26 percent. While many multinationals use similar structures, Google has managed to lower its overseas tax rate more than its peers in the technology sector. Its rate since 2007 has been 2.4 percent. According to company disclosures, Apple (AAPL), Oracle (ORCL), Microsoft (MSFT), and IBM (IBM)—which together with Google make up the top five technology companies by market capitalization—reported tax rates between 4.5 percent and 25.8 percent on their overseas earnings from 2007 to 2009. "It's remarkable that Google's effective rate is that low," says Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Dept. "This company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent." The corporate tax rate in the U.K., Google's second-largest market after the U.S., is 28 percent.

In Bermuda there's no corporate income tax at all. Google's profits travel to the island's white sands via a convoluted route known to tax lawyers as the "Double Irish" and the "Dutch Sandwich." In Google's case, it generally works like this: When a company in Europe, the Middle East, or Africa purchases a search ad through Google, it sends the money to Google Ireland. The Irish government taxes corporate profits at 12.5 percent, but Google mostly escapes that tax because its earnings don't stay in the Dublin office, which reported a pretax profit of less than 1 percent of revenues in 2008.

Irish law makes it difficult for Google to send the money directly to Bermuda without incurring a large tax hit, so the payment makes a brief detour through the Netherlands, since Ireland doesn't tax certain payments to companies in other European Union states. Once the money is in the Netherlands, Google can take advantage of generous Dutch tax laws. Its subsidiary there, Google Netherlands Holdings, is just a shell (it has no employees) and passes on about 99.8 percent of what it collects to Bermuda. (The subsidiary managed in Bermuda is technically an Irish company, hence the "Double Irish" nickname.)

Read more here

Summer Tax Institute at the University of California, Davis

While most people aren’t likely to associate the warm summer season with taxes, many tax professionals certainly are. The twentieth annual Summer Tax Institute is scheduled for June 14-17, 2010 in California. The institute is an educational program of the Center for State and Local Taxation.

The Summer Tax Institute is an intensive, 4-day educational program for professionals that attracts attorneys, accountants, state tax officials, tax directors, tax managers, and others seeking expertise in the area of state and local taxation. A certificate of completion (for continuing education purposes) is provided at the end of the program.

The program is said to be highly successful. According to the UC Davis Summer Tax website, www.summertax.org, it states that in written evaluations it has been indicated that over 95 percent of the participants would recommend the Institute to others. Also, students come from both the public and private sectors and represent accounting firms, law firms, state agencies, and private industry from throughout the country.

The site also boasts that tuition includes course materials, daily continental breakfast and lunch, a welcome reception on Monday night, and an excursion to the wine country for “dinner amid the vineyards” on Wednesday evening. It looks like the Summer Tax Institute reaches enrollment capacity most years, therefore, early registration is strongly recommended. What are you waiting for tax professionals?!

Obama Drops Plan for Corporate Tax Increase

While still looking for a way to fund health care reform, the Obama administration has dropped a plan to raise over $200 billion by changing a series of tax laws affect multinational corporations. According to the Wall Street Journal, the main reason the White House was hoping to make the change was because of their need to find new sources of federal revenue to fund their increased spending.

Jason Furman, a White House economic adviser, made that point clear at the end of a session with a dozen or so lobbyists in March. Catherine Schultz, head of tax policy at the National Foreign Trade Council, who was at the meeting, says Mr. Furman basically told the group: "We need the money."

From early on, there were reservations about the proposal among key lawmakers, and the White House indicated it was open to alternatives. Prominent members of the House Ways and Means Committee from both parties worried the provision would erode the competitiveness of U.S. companies abroad.

The tax dispute is rooted in an unusual provision in the U.S. tax code. Nearly all industrialized countries tax domestic companies only for revenues earned at home. The U.S. taxes companies on world-wide profits. But current U.S. law allows American multinationals to defer paying taxes on revenues earned abroad until companies repatriate them, usually in the form of cash dividends to the parent company.

Critics long have complained that the provision encourages companies to avoid U.S. taxes by expanding production on foreign soil. On the campaign trail last year, President Barack Obama promised repeatedly to "end tax breaks for companies that ship jobs overseas."

CA Tax Panel to Recommend New Business Tax

As my home state’s economic woes continue, the California tax commission has been working on ways to increase revenue. Reports suggest the commission is about to recommend a new business tax that has “never been tried on a wide scale in the U.S.” They will reportedly recommend repealing state sales and corporate taxes then try the all-new business tax instead. Check out the following clip of an Associated Press article discussing the announcement.

A commission charged with reforming California's tax structure will recommend repealing the state sales and corporate taxes, flattening the income tax rate and taxing businesses in a way that has never been tried on a wide scale in the U.S.

The Commission on the 21st Century Economy is expected to submit a sweeping report to the governor and Legislature Tuesday after spending a year looking for ways to stabilize California's volatile tax system.

A draft copy of the report obtained by The Associated Press said the commission will recommend California change its personal income tax structure to reduce the burden on the wealthy.

It also recommends replacing the state sales and corporate taxes with a new business levy that taxes net receipts, in an attempt to tax the value of all goods and services produced by businesses in the state.

Continue Reading at Google.com…

The Myth of a Corporate Tax Exodus

From Reuters.com:

When the Obama administration unveiled its plan to crack down on corporations using tax havens to avoid paying their full share of tax, there was a corporate outcry, especially loud in the business media. Many trumpeted the view of Americans for Tax Reform, which predicted that making companies pay their taxes would cause U.S. companies to move abroad, taking their capital and jobs with them.

That's a scary proposition, even when we're not in a recession. It's also utter nonsense. The American economic right wing often seems like a parody of the vulgar Marxist view; instead of asserting that all human behavior is based on economic decisions, the right wing asserts that all decisions are based on taxes. In reality, there are dozens of reasons why companies locate where they do: sure, taxes are one, but so are quality of infrastructure (especially communications); access to a productive and stable workforce; and the desire of employees to relocate.

And thus, not surprisingly, as multinational corporations adjust to the likelihood that their fictional headquarters in places like the Cayman Islands may have to end, the movement that we're seeing is not an exodus from the United States. Rather, as today's Wall Street Journal reports, the movement is from truly law-evading locales like the Caymans to better regulated low-tax jurisdictions like Ireland and Switzerland. Accenture (ACN) has become the latest company to approve such a move, joining Tyco (TYC), Ingersoll Rand (IR) and a host of other companies who have the option to declare their headquarters in just about any country but want to remain legitimate.

But look, if you're really still worried that Intel (INTC) or Microsoft (MSFT) are going to close up shop and move to India, there's a very simple solution. It's what the Senate version of a tax haven crackdown proposed the last time it was introduced: the government simply declares that any company doing $50 million or more inside the United States will be taxed as a U.S. corporation. That way, U.S. companies will be welcome to move abroad if they have good reasons, but avoiding taxation will not be one of them.

Latest Good Reads

E-file Hits Record 90 Million; 30 Million Filed From Home Computers.

The Tax that Dare not Speak its Name.

Taxes, Prices, and Consumer Protection.

A Noxious Environment: Bullying in the Workplace.

Will Multinational Corporations Survive the Coming Tax Changes?

Obama’s Plan on Corporate Taxes Unnerves the Indian Outsourcing Industry.

7 Tax Debt Prevention Tips for Senior Citizens.

Obama's Tax Plans Raises High-Tech Hackles

From the Associated Press:

President Barack Obama's plan to impose U.S. taxes on corporate America's overseas profits threatens to open a big crater in the financial statements of technology companies.

While additional taxes are rarely popular, Obama's decision to go after corporate earnings outside the United States is a particularly prickly subject for technology executives because the industry has been steadily boosting its overseas sales amid rising demand for its gadgetry and services.

If Obama's proposal becomes law, the hard-hit companies would include tech bellwethers like Hewlett-Packard Co., IBM Corp., Cisco Systems Inc., Microsoft Corp. and Google Inc. Each of those companies realized a benefit of more than $1 billion from lower foreign tax rates in their most recent fiscal years — an advantage that could lost if Obama is able to change the rules.

"It would be like an earthquake for high tech," said Carl Guardino, chief executive of Silicon Valley Leadership Group, an industry trade association. "On a Richter scale of 1 to 10, this would be a 12."

Collectively, HP, IBM, Cisco, Microsoft and Google lowered their tax bills by a combined $7.4 billion in their last fiscal years by taking advantage of lower tax rates outside the United States, according to an analysis by The Associated Press.

Through the years, these five tax companies have avoided U.S. income taxes and foreign withholding taxes on a combined $72 billion in undistributed earnings from their foreign operations.

While Obama's proposal might not tax all the money U.S. companies keep overseas, it apparently would target a big chunk. Obama estimated his plan would raise a total of $210 billion, or an average of about $21 billion annually, over a 10-year period.

By reinvesting their earnings overseas, U.S. companies insulate themselves from much higher tax rates had the money been made in their home country.

Google, for instance, would have been hit with an effective tax rate of 45.2 percent instead of 27.8 percent last year if it hadn't been able to capitalize on lower rates overseas, according to the Mountain View-based company's annual report. Without the lower foreign rates, Google's 2008 tax bill would have been $1.02 billion higher. Google's income before taxes totaled $5.85 billion last year.

Obama has been strongly supported so far by Google CEO Eric Schmidt, who campaigned for the president last year and has subsequently served as a technology adviser.

Google spokesman Adam Kovacevich said Monday it was too early to evaluate how Obama's tax proposal might affect the Internet search leader's operations because the idea is likely to be revised as it wends its way through Congress.

HP reaped a $1.77 billion benefit in its fiscal 2008 from lower foreign tax rates while Cisco and Microsoft each saw benefits of more than $1.6 billion, according to the companies' annual reports. IBM's foreign tax advantage last year totaled about $1.3 billion.

The high-tech industry isn't the only beneficiary from the current tax rules. General Electric Co., for instance, lowered its effective tax rate by nearly 27 percent last year by keeping profits outside the United States. That saved the company more than $5 billion in potential U.S. taxes.

And offshore earnings enabled drug maker Johnson & Johnson to lower its effective tax rate by 12.4 percentage points last year, saving about $2 billion.

Obama reasons that U.S. companies will create more jobs in the United States if there is less of an advantage to setting up operations overseas.

But Guardino disagrees, maintaining that high-tech firms and other U.S. companies are establishing more foreign offices to take advantage of their biggest growth opportunities. And as they bring in more revenue overseas, companies are also able to hire more workers in the United States as well as in other countries, Guardino said.

As it is, Google already generates more than half its revenue outside the United States and that percentage is expected to increase as more people around the world go online and gravitate to the company's services.

If they face higher taxes on their foreign earnings, high-tech companies will be at a competitive disadvantage that will discourage them from expanding their payrolls, Guardino said.

By coincidence, Guardino and about 50 Silicon Valley executives had already scheduled a trip to Washington this week. Guardino said the group plans to focus on meeting with lawmakers to explain why Obama's idea to tax overseas profits would do more harm than good.

Geithner: Changes Will 'Restore Balance' To Tax Code

The White House unveiled some new tax cut benefits for corporations, that Treasury Secretary Timothy Geithner says will restore balance to the US tax code. I have included a snippet from a Wall Street Journal story on the new changes, but the full text can be read here.

The White House on Monday unveiled proposals to cut tax benefits for U.S. corporations that invest overseas and to use some of the expected revenue to make permanent a tax credit for investment in research and development.

U.S. President Barack Obama hailed the proposal and another intended to crack down on individuals who use overseas accounts to dodge U.S. taxes. Collectively, the administration said two proposals and other international tax changes to be released with the administration's budget later this month would raise $210 billion over 10 years.

The proposals target the foreign profits of U.S. firms like Intel Corp. (INTC), Eastman Kodak Co. (EK), Agilent Technologies (A), Johnson & Johnson (JNJ), Motorola Inc. (MOT) and Pfizer Inc. (PFE).

U.S. Treasury Secretary Timothy Geithner, who appeared with Internal Revenue Service Commissioner Douglas Shulman alongside the president on Monday, said the administration's proposals are intended to "restore balance" and fairness to the U.S. tax code and end "indefensible tax breaks."

Obama called the proposed changes a "down payment" on reforms to ensure that U.S. companies "pay what they should."

Currently, U.S. businesses may take immediate deductions on their U.S. tax returns for expenses on overseas investments, but defer paying U.S. taxes on profits from those investments. Obama characterized the practice as part of a "broken" tax code that favors companies for investing overseas as opposed to those that invest and create jobs at home.

Under the administration's proposal, companies would be barred from taking deductions on their U.S. taxes for offshore investments until they pay taxes on their offshore profits. It calls for the change to take effect in 2011, estimating it would raise $60.1 billion from 2011 to 2019.

That is similar to a measure proposed by House Ways and Means Chairman Charles Rangel, D-N.Y. But in one difference from the Rangel proposal, the White House plan would preserve the tax benefit for U.S.-based research that is related to overseas business.

Additionally, the administration called for new limits on tax provisions that allow U.S. businesses to claim a credit against their U.S. taxes for the foreign taxes paid, saying some U.S. firms take advantage of it by inflating or accelerating foreign-tax credits. Closing such loopholes would raise $43.0 billion from 2011 to 2019, the administration said.

Expected revenue from such changes would fund a permanent extension of the research and development tax credit, now set to expire at the end of the year, the administration said. Obama plans to provide a $74.5 billion R&D tax credit over 10 years to businesses that invest in the U.S. The administration also is looking to beef up IRS enforcement, proposing to add 800 full-time employees at the tax-collection agency.

Government Throws in the Towel on KPMG

From the Wall Street Journal:

It’s over. The Justice Department declined to ask the Supreme Court to review the 2nd Circuit’s ruling in U.S. v Stein. That’s the case, once billed by the government as the largest tax-fraud prosecution in history, in which U.S. District Judge Lewis Kaplan of Manhattan (pictured, left) dismissed the indictments of 13 former KPMG executives because prosecutors violated their rights. The violation? Pressuring KPMG not to pay the defendants’ legal fees.

More than three months ago, the 2nd Circuit affirmed Kaplan’s decision. The deadline to file a petition for writ of certiorari with The Supremes was last week. “All indications were that they would not [petition the Supreme Court], but we were not taking anything for granted,” says David Spears, who represents defendant Jeffrey Stein.

Meanwhile, a watered down version of the original case is underway before Judge Kaplan. Three former KPMG executives and an ex-partner at Sidley Austin are facing charges that they sold bogus tax shelters.

A spokeswoman for the Southern District of New York, which brought the case, declined to comment.

On Dividend Taxes, It’s a Post-Partisan Race

From NYTimes.com:

Barack Obama is often described as a post-partisan politician who transcends traditional ideological divides. Is it true? At least when it comes to one small but important aspect of tax policy — the treatment of corporate dividends — the answer appears to be yes. Without much fanfare or public notice, Senator Obama has embraced a central element of the Republican agenda.

Let’s start with some history. Before 2003, when a person received dividends from his stock holdings, this income was taxed at ordinary income tax rates. That is, a dollar of dividends generated the same individual income tax liability as did a dollar of wages.

But many economists have long argued against taxing dividends this way. Dividends are a stockholder’s payment from corporate profits, and these profits have already been subject to the corporate income tax. Any tax on dividends represents a second tax on essentially the same income.

One can question whether this double taxation of income from corporate capital is fair. But fairness aside, there is also the problem of incentives. Taxing dividends twice substantially raises the overall tax burden on this form of income and distorts various decisions. Whenever taxes, rather than true costs and benefits, drive the allocation of resources, the economy shrinks below its potential.

Here are five ways a heavy tax on dividends messes things up:

CONSUMPTION VS. SAVING

When the tax system depresses the return on a major asset class like corporate equities, households have less incentive to save for the future. Reduced saving means less funds for capital accumulation, which in turn impedes economic growth.

HOUSING VS. BUSINESS CAPITAL

Wealth invested in your own home has several tax advantages. These include the mortgage interest deduction and the absence of any tax on imputed rent (the value that homeowners earn implicitly by getting a place to live). By taxing business capital highly, the tax laws induce people to invest too much in housing and too little in businesses.

NONCORPORATE VS. CORPORATE

Because non-corporate businesses like partnerships are taxed only once, they have an advantage over twice-taxed corporations. Consequently, too much of the economy’s capital stock ends up in the non-corporate, business sector.

DEBT VS. EQUITY FINANCE

Because interest payments on corporate debt are deductible for corporate income tax calculations, this capital income is taxed only once. This asymmetric treatment of debt and equity finance induces companies to issue more debt than they otherwise would, increasing leverage and the economy’s financial fragility.

RETAINED EARNINGS VS. DIVIDENDS

Companies can avoid the dividend tax by retaining earnings rather than paying dividends. Excessive retained earnings, however, impede the movement of capital from older cash-generating companies to newer ones with better prospects.

U.S. Corporate Taxes Now 50 Percent Higher than OECD Average

The Tax Foundation recently completed a study on how United States Corporate tax rates compare to other countries around the world. The graph below shows how our tax rate has remained rather constant, while other countries rates have lowered over time. Also below is a quote from the article accompanying the study, you can read the full text here.

“Amid rising concerns about the state of the U.S. economy, new data compiled by economists at the OECD shows that for the 17th consecutive year the average rate of corporate taxes in non-U.S. countries fell while the U.S. corporate tax rate stayed the same. As a result, the overall U.S. corporate tax rate is now 50 percent higher than the OECD average.

Combined with another new OECD study that calls the corporate income tax the most harmful type of tax for economic growth, the implications for U.S. policy are clear. The long-term prospects of the U.S. economy are at risk as long as our corporate tax rate remains out of step with the rest of the world.

The U.S. continues to have the second-highest combined federal-state corporate tax rate among industrialized countries at 39.3 percent. Only Japan has a higher overall corporate tax rate at 39.5 percent. By contrast, the average corporate tax rate among OECD countries has fallen a full percentage point in the past year, from 27.6 percent to 26.6 percent. Ireland's 12.5 percent corporate tax rate remains the lowest among OECD nations.

The OECD data shows that nine of the 30 OECD member nations have lower corporate tax rates in 2008 than in 2007, including Canada, Germany, New Zealand, Spain, the United Kingdom, Italy, Switzerland, the Czech Republic and Iceland. Germany made the biggest change, cutting its corporate rate 8.7 percentage points from 38.9 percent to 30.18 percent. Consequently, Germany fell from having the third-highest overall rate to seventh highest. France now imposes the third-highest rate of 34.4 percent.

Italy had the second-largest rate cut, lowering its rate 5.5 percentage points, from 33 percent to 27.5 percent. Consequently, Italy dropped in the rankings from seventh highest to fifteenth highest. Canada, meanwhile, dropped from fourth- to fifth-highest after cutting its overall corporate rate from 36 percent to 33.5 percent.”

Report Shows Most Companies Avoid Federal Taxes

From the Associated Press:

“Two-thirds of U.S. corporations paid no federal income taxes between 1998 and 2005, according to a new report from Congress.

The study by the Government Accountability Office, expected to be released Tuesday, said about 68 percent of foreign companies doing business in the U.S. avoided corporate taxes over the same period.

Collectively, the companies reported trillions of dollars in sales, according to GAO's estimate.

‘It's shameful that so many corporations make big profits and pay nothing to support our country,’ said Sen. Byron Dorgan, D-N.D., who asked for the GAO study with Sen. Carl Levin, D-Mich.

An outside tax expert, Chris Edwards of the libertarian Cato Institute in Washington, said increasing numbers of limited liability corporations and so-called ‘S’ corporations pay taxes under individual tax codes.

‘Half of all business income in the United States now ends up going through the individual tax code,’ Edwards said.

The GAO study did not investigate why corporations weren't paying federal income taxes or corporate taxes and it did not identify any corporations by name. It said companies may escape paying such taxes due to operating losses or because of tax credits.

More than 38,000 foreign corporations had no tax liability in 2005 and 1.2 million U.S. companies paid no income tax, the GAO said. Combined, the companies had $2.5 trillion in sales. About 25 percent of the U.S. corporations not paying corporate taxes were considered large corporations, meaning they had at least $250 million in assets or $50 million in receipts.

The GAO said it analyzed data from the Internal Revenue Service, examining samples of corporate returns for the years 1998 through 2005. For 2005, for example, it reviewed 110,003 tax returns from among more than 1.2 million corporations doing business in the U.S.

Dorgan and Levin have complained about companies abusing transfer prices - amounts charged on transactions between companies in a group, such as a parent and subsidiary. In some cases, multinational companies can manipulate transfer prices to shift income from higher to lower tax jurisdictions, cutting their tax liabilities. The GAO did not suggest which companies might be doing this.

‘It's time for the big corporations to pay their fair share,’ Dorgan said.

IRS Releases Updated Drafts of Corporate and Partnership Tax Forms

According to a recent news release, the IRS has “released for public comment draft revisions to Form 1065, U.S. Return of Partnership Income, Form 1120, U.S. Corporation Income Tax Return, and certain related schedules. Included in the release are new Schedule B for Form 1120 and Schedule C for Form 1065. These forms will be for use for tax years ending on or after Dec. 31, 2008.

The draft forms reflect changes suggested in comments received from the initial drafts released in August 2007.

‘The draft revisions and new forms will increase transparency about the ownership and relationships between entities that make up complex enterprise business structures,’ said Frank Y. Ng, Commissioner of the Large and Mid-Size Business Division of IRS. ‘This will enable IRS to better assess compliance risk.’

The major change to Form 1120 is to Schedule K and involves reporting direct and indirect ownership. When ownership meets certain percentage thresholds, it must be reported on Schedule K. Certain questions on Schedule K have been revised for this reporting.

The new Schedule B (Form 1120) is required of corporations that file Form 1120 Schedule M-3. Schedule B (Form 1120) will provide IRS information about allocations, transfers of interest, cost sharing arrangements, and changes in methods of accounting.

The major changes to the Form 1065 also involve ownership issues. When ownership meets certain percentage thresholds, it must be reported on Schedule B (Form 1065). The revised Schedule B (Form 1065) will also be used to provide information about cancelled debt, and like-kind exchanges that the partnership may have participated in at any time during the tax year. For small partnerships, the asset threshold for filing Schedules L, M-1 and M-2 with Form 1065 has been increased from $600,000 to $1,000,000.

The new Schedule C (Form 1065) will be required of Form 1065 filers that file Schedule M-3. Schedule C (Form 1065) will be used to report information about related party transactions, allocations, transfers of interest, cost sharing arrangements and changes in methods of accounting.

New instructions for Item J of Schedule K-1 (Form 1065) clarify how partnerships determine partners’ percentage share in the profit, loss, and capital at beginning and end of the partnership’s tax year.”

Other Countries Have Simpler Tax Systems

The Tax Foundation Tax Policy Blog has an interesting article on how other countries around the world are taking steps to simplify their tax systems. Additionally, some of these countries are greatly lowering their corporate tax rates, while the United States corporate rates remain the second highest in the industrialized world at 39.3%. According to the entry, the following countries are taking the actions listed:

• Poland may adopt a flat tax
• Iceland and Taiwan to cut corporate tax rates
• People leaving Ireland due to high personal income taxes
• Hungarian government considers a flat tax
• Kuwait cuts corporate tax rate
• Swiss canton adopts flat tax

For the full entry check out More Countries Move to Simpler, Lower Taxes.