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Migrating the US corporate tax systems to a sales factor apportionment corporate tax would not only simplify the tax code, but also ensure that all businesses pay their fair share.

A sales factor apportionment corporate tax accomplishes all this, and reduces the burden of corporate tax compliance, by:

  • Removing the incentives for multinational corporations to leave their profits in off-shore tax havens.
  • Leveling the playing field between purely domestic businesses and multinational corporations.
  • Reducing tax incentives to locate jobs and manufacturing operations in lower tax foreign nations, bringing opportunities for economic activity to the U.S.
  • Maintaining Congress’ ability to lower rates and/or increase revenue.

Currently, multinational corporations easily manipulate loopholes in the existing tax system to avoid paying U.S. taxes on their global income. This plan would provide a simple solution to this problem by taxing corporations based on their global profits apportioned by the share of their sales made in the United States. According to an investigation by the Senate Subcommittee on Permanent Investigations, Apple Inc. used offshore entities to avoid paying taxes on $44 billion in otherwise taxable income. A sales factor apportionment model would make such tax avoidance impossible, because it would determine a company’s U.S. taxable income solely on the percent of its sales made in the U.S.

How It Works

The model is very simple:

  • ABC Corporation sells $10 million of MP3 players this year to customers around the world.
  • $1 million of those sales (10% of total sales) are made to U.S. customers.
  • So 10% of ABC Corporation’s worldwide profit will be taxed by the US government.

Where the company says it earns its income would be irrelevant, as the US would base its determination of what income to tax solely on the percent of any company’s sales made to U.S. customers. It would apply the same formula to all foreign corporations selling goods and services into the United States, leveling the playing field between US headquartered companies and its overseas competition.

Why It’s Better

Determining corporate tax liability using sales factor apportionment apportionment of global profits is superior to the existing system for the following reasons:

  • It Keeps Jobs in America: With reduced tax incentives to offshore production and manufacturing to reduce tax liability, companies will be incentivized to leave its manufacturing in the US–or to bring it back.
  • It Levels the Playing Field for Small Businesses: Small businesses do not have the ability to offshore their income by using foreign tax havens. It’s nearly impossible for a small business paying a 35% tax rate to compete against a big multinationals that pays little or no tax on its U.S. sales.
  • It Levels the Playing Field against foreign competitors: Overseas companies can now use transfer pricing and tax havens to keep their U.S. operations at break-even, giving them an edge over tax-paying domestic firms. Basing their U.S corporate tax solely on the percent of their U.S. sales eliminates this unfair advantage.
  • It Can Raise Revenue and/or Lower Rates: Shifting to a sales-based single factor formulary apportionment will raise revenue without raising rates, because it will stop multinationals from being able to keep their profits offshore and avoid paying US taxes. Some–or all–of this revenue could be used to lower rates to as low as 25% without affecting existing tax incentives included in tax expenditures.
  • Eliminates Tax Incentive for U.S. Companies to Move their Headquarters Abroad: With a sales based tax, moving to a tax haven has no effect on the tax owed the U.S.