Obama can increase the tax on carried interest unilaterally

My latest Dealbook column: President Obama could change the tax treatment of carried interest with a phone call to the Treasury Department. But the White House will need a precise understanding of the regulatory landscape to make a change that is fair, easy to administer, and will hold up in court. via How the President[…]

How Tax Laws Distort the Pfizer Deal

But the clearest distortion is not size, but location. For multinational corporations based in the United States, taxes create an incentive to expand overseas operations by opening foreign subsidiaries, expanding foreign operations and acquiring foreign companies. Unlike a pure tax shelter, which generates paper losses to avoid taxes, the effects of tax expatriations are real.[…]

Taxes Won’t Kill Bitcoin, but Tax Reporting Might – NYTimes.com

My take on the bitcoin guidance: Bitcoin is a digital representation of value, not a real currency, according to the latest pronouncement from the Internal Revenue Service.The I.R.S. on Tuesday released guidance indicating that Bitcoins and other so-called virtual currencies that do not have the status of legal tender in any jurisdiction would be treated[…]

Baucus Cost Recovery Proposal

A tax proposal released on Thursday by the chairman of the Senate Finance Committee, Max Baucus, addresses a topic that tends to make my students’ eyes glaze over: cost recovery.Cost recovery is a technical topic but one that may shape our economic future, because it affects the calculations of every business manager making a decision[…]

Baucus International Tax Proposal

Changes to the tax code always create winners and losers. An ambitious plan to revise the system for taxing multinational corporations, released on Tuesday by the Senate Finance Committee chairman, Max Baucus, would hit technology companies and large pharmaceutical companies especially hard. Companies like Pfizer, Apple, Hewlett-Packard and Microsoft have become masters at reducing their tax liability in the United States by shifting income overseas.

These companies often hoard cash in offshore subsidiaries, and in the past they have successfully lobbied for a tax holiday to repatriate cash at lower tax rates. The Baucus proposal would, among many changes, end this practice of tax deferral and impose a minimum tax of about 20 percent on overseas profits — whether those profits are repatriated to the United States or not.

Why Twitter May Have to Pay Income Taxes One Day – NYTimes.com

Potential investors in Twitters’s planned initial public offering may be struggling to estimate how much the company will have to pay in taxes in the future. An article in Politico on Friday highlighted some of the techniques Twitter might use to legally avoid taxes. Twitter’s biggest potential tax shelter is its history of losing money.[…]

A Holiday From Taxes

Large multinationals based in the United States – among them General Electric, Pfizer, Apple and Citigroup – have been hoarding record amounts of cash overseas, mainly because of the 35 percent tax they would have to pay if they brought it back to the United States.

The American Jobs Creation Act of 2004 offered a temporary tax holiday that allowed firms to repatriate cash at about a 5 percent tax rate, but there were strings attached. The repatriated money was to be used only on permissible activities like research and development, capital expenditures and pension funding. It was not to be used for shareholder dividends or share repurchases.

The purported goal of the legislation was to create jobs, not simply to enrich shareholders at the expense of federal tax revenue. In recent years, companies have lobbied for another tax holiday.

Tax policy experts are suspicious of tax holidays, and most experts question the effectiveness of attaching strings to such legislation. Because cash is fungible, companies might be expected to use the repatriated money for permitted domestic activities that they would have conducted anyway, freeing up other cash to be used for dividends and stock buybacks. If companies merely reshuffle the use of cash without changing behavior, then the tax holiday amounts to a windfall to shareholders, not an effective economic stimulus.

The 2004 tax holiday brought back $312 billion in extraordinary cash dividends from foreign subsidiaries. How much of that cash was used for permitted activities, and how much for impermissible dividends and stock buybacks? A 2011 paper by Dhammika Dharmapala, C. Fritz Foley and Kristen J. Forbes, published in The Journal of Finance, estimated that 60 cents to 92 cents of every repatriated dollar was spent on shareholder payouts in 2005. The paper is Exhibit A in the case against future tax holidays.

A new paper by Thomas J. Brennan of the Northwestern University School of Law challenges that study and finds that, for the 20 companies that repatriated the most cash, 78 cents of every dollar was spent on permissible uses, and just 22 cents on impermissible shareholder payouts. Extending the analysis to 341 companies outside the top 20, Mr. Brennan estimates that about 40 cents of every dollar was spent on impermissible shareholder payouts, still much lower than the earlier estimate.