Economic Perspective: Territorial Versus Global Business Taxation

MARY WALDEN:

“Today’s program looks at territorial versus global business taxation. Mike, President Trump just unveiled his tax plan. One of the elements is moving from taxing business revenues on a global business to taxing them on a territorial basis. What does this mean and why should the average person care?”

MIKE WALDEN:

“Well the U.S. currently has a global basis for taxing business revenue. What that means is if you’re a business, and you have sales in the U.S., obviously those sales are going to be taxed. But if you have sales in foreign countries, we also tax the revenues from those sales.”

“Now if you, for example, don’t bring that money back to the U.S. you don’t have a tax. It’s only when those sales from foreign countries come back to the U.S. will it be taxed. Most other countries have a different system though. It’s called a territorial system, which would mean that a company is only taxed on the revenues in their home countries. Sales in foreign countries aren’t taxed at all.”

“And so, since we are different, we have this global system where you’re taxed on both foreign and domestic sales. Many say that’s keeping the U.S. companies at a disadvantage, and they also say that it’s motivating companies in the U.S. to move their headquarters to foreign countries because again if they’re a U.S.-based company, and they have foreign sales, once they bring the revenue from those sales back to the West, they’re going to be taxed.”

“So this is a long-winded way of saying that the U.S. seems to be out of sync here, and the president has said that hey, we want to get in sync with the rest of the world, and we think they’re going to be good things that would occur from that. For example, it’s estimated that there’s two trillion dollars of money that are in foreign countries that is owned by U.S. based, U.S. headquartered companies, that they’re not bringing back to the U.S. because they don’t want to ya tax on it.”

“So what the president has proposed will allow that money to come back, we’ll tax at a very modest rate and we’re going to change the plan. We’re going to go to this territorial plan where companies in the future won’t have to worry about paying taxes on those foreign revenues.”

“So this is actually a big deal because it could affect how many companies choose to have their companies in the U.S. It could affect how many jobs are in the U.S. So this is something I think is going to be very strongly considered in Congress.”

Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.