Tuesday, 18 Dec 2018

Sherrod Brown's tax calculations on GM's move to Mexico

"I said that the first thing to do is to remove this tax – this provision from its tax bill that gives a company a coupon of 50% of its taxes. If you produce in Lordstown, you pay a tax rate of 21%. If you move to Mexico, you pay a tax rate of 10.5%. "

– Senator Sherrod Brown (D-Ohio), interview with CNN's "New Day" on November 29.

General Motors' announcement of a shutdown at its car assembly plant in Lordstown, Ohio has angered many politicians, including Brown. In an interview on CNN, he recounted a conversation with President Trump in which the senator informed him that there was a "50% coupon" in the tax bill signed by the president in 2017 "He was not really aware of that," Brown said.

According to Brown's reasoning, GM will pay only 10.5% of corporate tax in Mexico, compared to 21% in the United States. But one reader wondered if this was really correct, given that the corporate tax rate in Mexico is 30%. We will take a look.


The new tax law contains many complex and obtuse provisions, with acronyms such as GILTI (global low-tax intangible income) and FDI (foreign-derived intangible income). The Congress wanted to find a way to convert to a new tax system, known as the Territorial-Global Hybrid System, but it was literally a full-employment law for tax lawyers. We will try to keep this explanation as simple as possible after consulting various experts.

Prior to billing, the official corporate tax rate in the United States was 35%. It has been reduced to 21% in the 2017 tax law, with a US minimum tax rate of 10.5% on total foreign income if the foreign tax rate of a multinational is considered too low.

It looks like 50% Brown's coupon, but it's not that simple. Brown suggests that the tax bill encourages businesses to move abroad, but compared to the previous law, it often reduces them. The old rate was 35% in the US and US foreign income taxes were, in many cases, close to zero, as US multinationals could postpone US taxes indefinitely if they retained those profits in the US. And because of various ways for businesses to play against the system.

Thus, the 10.5% tax on foreign income only really occurs when a foreign country applies a low tax rate. This low rate was to be 13.125%, as 80% of these taxes could be credited against the 10.5% rate. (Some companies however complained that they could be subject to minimum tax even though their rate was above 13.125% .We told you that it was complex.)

What is the tax rate of Mexican companies? Thirty percent. Thus, in a banal case, there would be no US tax due on the multinational income earned in Mexico. But profits may be transferred from Mexico to a tax haven, in which case there may be no Mexican tax. Meanwhile, US tax could rise further depending on the other investments of the multinational around the world.

In other words, despite the certainty expressed by Brown in the interview, it is unclear whether GM would save taxes by moving a factory to Mexico. (GM may not have been the best example in that it has had significant net operating losses and may not pay a lot of taxes in all circumstances, experts said.)

GM contends that the law made no difference to the company regarding the location of its facilities.

"The new tax law does not create any tax incentive for GM to relocate its activities outside the United States," said GM spokesman David Caldwell. "GM pays more than the total tax rate of 21% on its activities abroad."

Brown's staff concedes that his words may not have been clear as he tried to speak in shorthand. Although he seemed to be talking about taxes paid by GM in Mexico, it was not his intention, said his office in a statement: "Senator Brown does not refer to the corporate tax rate in the United States. Mexico. He discusses how the US tax code treats multinational companies based in the United States and their profits abroad. We are only talking about US taxes, not Mexican taxes. (Staff provided examples of situations in which Brown correctly framed this situation.)

"It's almost impossible for anyone to explain in detail the complex code of corporate taxes in one piece, Senator Brown has made it clear: we need a tax code that invests in US jobs and workers, not in companies sending their jobs overseas, "said the spokeswoman. Jenny Donahue said.

Martin A. Sullivan, chief economist at Tax Analysts, made famous the fact that American companies were diverting their income abroad. He supports Brown's argument that foreign earnings should not be treated differently than income earned in the United States. "We should get rid of the 50% coupon, but it's better than the previous law," he said. "Under the previous law, the incentive to invest abroad was much greater. These are extremely complicated rules that will probably increase taxes on foreign investment. "

As he said, "the basic framework is directed against multinational corporations".

The Congressional Budget Office, in an April report, noted that the interaction between various provisions of the tax legislation "could increase the incentive for corporations to locate tangible assets at the same time. foreign". Sullivan, in his own analysis of these provisions, wrote that "It will not really depend on whether the foreign country applies a low corporate tax rate and that the manufactured product has low margins, such as This particular situation could encourage a company to set up a factory abroad.

Other experts say that Congress has missed an opportunity by instituting a minimum tax applied to a global tax rather than a minimum tax per country. Rebecca Kysar, a law professor at Fordham University, who testified before Congress on the effects of the law, said the new law should not be judged according to the old law but according to policies which could have been adopted. Now, "companies can combine their low-tax and heavily taxed foreign income by reducing or eliminating their minimum tax obligations in the US," she said. "If the minimum tax was imposed per country, the corporation would not pay any minimum tax in Mexico because it would tax Mexican taxes on its US income, but it would pay a minimum US income tax from the tax haven."

The Pinocchio test

In her interview, Brown suggested that GM taxes would be 50% discount if she transferred a US plant to Mexico. The basic figures are correct – the new tax law applies a corporate tax of 21% on US income and 10.5% on foreign income. But he erred in appearing to apply this formula to the specific example of GM transferring a plant to Mexico, when circumstances suggest that this would probably not be the case. His staff stated that he had spoken in shorthand, which was likely to be misinterpreted. It is certain that its formulation has confused our reader – and the fact checker at the beginning.

We do not try to play Gotcha here at The Fact Checker, so we will not assign pinocchios. But Brown should take care to talk more specifically about what he perceives as loopholes in the new tax law.

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