FOCUS : The Debate on Taxation of Foreign Firms : IRS: The agency contends that billions in profits are being shifted overseas. Japanese companies say they are being unfairly targeted.
The Internal Revenue Service is aggressively investigating foreign-owned firms in the United States, contending that they are avoiding billions of dollars in U.S. taxes by improperly shifting profits to overseas parent firms. Japanese affiliates, in particular, feel that they are being targeted for review, although the IRS denies it. In any case, IRS statistics show that Japanese-owned firms do report lower taxable profits in the United States than both foreign-owned firms in general and U.S. firms in comparable industries.
The question, however, is why. Some critics charge that Japanese firms are ducking U.S. taxes to save money and gain a competitive edge. Others say there is no incentive to do so because the Japanese corporate tax rate of 37.5% for large firms is higher than the top U.S. rate of 34%.
To illuminate the issue, Staff Writer Teresa Watanabe interviewed two people familiar with the debate.
Rep. Duncan Hunter (R-El Cajon) believes that some Japanese firms are defrauding U.S. taxpayers to save money. Saburo Oto, an accounting specialist on Japan, says any incentive to amass profits in Japan is more a reflection on an insular business culture that must change with the times.
Rep. Duncan Hunter (R-El Cajon):
The thing that threw up the red flag with the Japanese was with the massive amounts of business done in the U.S.--they paid almost no taxes at all. Obviously, Japanese businesses that have been refusing to pay taxes are not in the least bit intimidated by the American tax collection system. They feel they can beat it--and they have beat it.
Here you have Japanese firms doing business in the United States, and in 1987 they claimed they made a net profit of less than 12 cents per $100. All foreign companies (reported profits) six times as much as the Japanese. American corporations (reported profits) 70 times as much as Japanese companies. That’s outrageous.
The motivation of foreign companies to hide corporate profits is, in my estimation, done simply for the purpose of saving money. The tax delinquency creates an uneven field of competition for American companies.
I think we’re going to have to enact a tax system for foreign companies doing business in the United States which is simpler to enforce. I think a flat tax of some type based on total receipts would be fair and easily enforceable. That means if you do $100 worth of business in the U.S., we’re going to presume you made a 5% profit and charge you taxes on it.
It’s clear the present system isn’t working. We’re allowing foreign companies to do business in the United States and in some cases drive American corporations out of business, while at the same time completely avoiding their fair share of taxes.
Saburo Oto, co-managing partner of Japanese practice, Deloitte & Touche accounting firm:
Japanese may tend to concentrate profit in Japan. But the Japanese tax rate is higher than the U.S. The tax issues between the U.S. and Japan are really rooted in the problem of Japanese business practices, where they don’t focus on consolidated earnings (earnings of the parent firm and all subsidiaries worldwide).
Japanese securities analysts and the financial institutions, to understand the strength of a company, do not pay attention to consolidated earnings as much as to the earnings reported by the parent company. Because of that type of practice, all Japanese try to have income in the parent company. It makes more sense.
The Japanese have not adjusted themselves to internationalization. They go out and set up businesses around the world, but the fruits of business have to be enjoyed in Japan.
It’s difficult to adjust. It’s a management issue. There isn’t localized management. For most managers of the U.S. subsidiary, the guy in Japan is their boss. They tend to listen to the boss’s instruction. So their long-term mentality is with the parent company.
But the world won’t allow Japanese companies to operate the way they’ve been doing in the last 20 years. The business environment is getting more difficult to operate in in this country. This is going to really force Japan to think about borderless management. They may have to let their profits go to the lowest tax rate (abroad). They have to think about sharing their fruits with the countries where they do business.
