Dive brief:
- TThe cost of tax compliance for large companies rose by 32% between 2017 and 2023, blamed on increasingly complicated international rules, the alternative minimum corporate tax and changes in the Tax Cuts Act taxes and jobs in 2017, the Tax Foundation said.
- Multinational companies on average spent $25.6 million to comply with income tax rules in 2022 or 2023, the Tax Foundation found in a survey of 21 corporations. Companies estimated that, on average, 43% of their federal income tax compliance costs came from rules related to foreign source income.
- Companies, on average, increased funds earmarked for tax compliance by 29% from 2017 to 2023, the Tax Foundation said. “Although the sample size is small and limited to relatively large firms, the evidence points to economies of scale in tax compliance costs, meaning that smaller firms are disproportionately burdened and disadvantaged by the fiscal complexity”.
Diving knowledge:
Sporadic attempts to streamline and simplify the US tax code have failed to reverse decades of regulatory and legislative changes that have made it more complex.
The Internal Revenue Code has increased by approximately 40% over the past three decades, from 3.1 million words in 1994 to 4.3 million words in 2021, according to a paper published in December 2023 by the National Bureau of Economic Research. It is the largest and most complex tax code among six countries reviewed in the study.
“Filing costs and complexity have grown over time,” the researchers said, noting that most taxpayers “would be willing to pay to simplify the tax system.”
American taxpayers this year will spend more than 7.9 billion hours complying with the tax code at an estimated annual compliance cost of $413 billion, based on average hourly compensation, the Tax Foundation said, citing estimates of the Internal Revenue Service and the Office of Information and Regulatory Affairs.
companies pay almost 119 billion dollars to complete income tax returns and an additional $70 billion each year by filing quarterly tax forms and repayment schedules, the Tax Foundation said, citing IRS/OIRA estimates.
Multinationals and other businesses face pressure “responding to the ever-increasing demand for tax transparency,” Deloitte found in a survey of more than one 1,000 tax and financial managers of large companies.
“The effective execution of tax transparency strategies will be a key priority going forward and MNEs are likely to face challenges in balancing their resources between compliance and the needs of their business,” Deloitte said.
Comments from candidates during the current election season suggest that Washington can reduce tax compliance costs in the coming years, according to Will McBride, vice president for federal tax policy and author of the survey report for the Tax Foundation, a group think tank based in Washington. .
“Company tax compliance costs are likely to decrease in some respects, and there is still little chance of fundamental reforms that simplify business taxes,” he said Thursday, noting that “the candidates have been vague about their fiscal plans”.
For example, lawmakers from both parties agree that the requirement to depreciate research and development, which began in 2022, should be reversed and reinstated as spending, McBride said.
The requirement to depreciate R&D “is cited by many companies in the survey as generating significant compliance costs,” he said in an emailed response to questions.
Businesses surveyed by the Tax Foundation filed a federal tax return with an average of 10,567 pages, and most said they completed several other filings in the past year, with an average of 42 total filings.
Businesses also filed an average of 554 state income tax returns, 170 local tax returns and 764 foreign income tax returns last year, the Tax Foundation said.
“All companies in the sample indicated that tax complexity has increased since 2017,” the Tax Foundation said.
