Tags: Chambers | Cisco | offshore | tax

Cisco CEO Chambers: 'US Tax System Is Broken'

Thursday, 20 Jun 2013 11:32 AM

By Michael Kling

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Cisco Systems holds nearly $50 billion in offshore tax havens, and that money will not be coming back to the United States because the firm would have to pay U.S. taxes if it repatriated the money, according to Cisco CEO John Chambers.

"The U.S. tax system is broken," Chambers told CNBC.

"We have waited for four years for this almost $50 billion that we have got overseas to come back. We are assuming that is not going to happen. We do not think we are moving with the speed needed."

Editor's Note:
The IRS’ Worst Nightmare — How to Pay Zero Taxes

Cisco and other corporations are pressing for a tax break, or tax holiday, that would cut taxes on repatriated funds.

Instead of repatriating the funds, Cisco will invest overseas, particularly in emerging markets and the Asia-Pacific region, he stated.

Governments should work with corporations to find strategies to increase growth, Chambers added.

"This is where tax policy can determine where you grow and where you don't," he noted.

"I am a proud American company, probably one of the very few high-tech companies that is big and has been around for 25 years, and still has the majority of our employees in the U.S.," Chambers said.

Many agree that that the U.S. tax system is broken, but there is widespread disagreement about solutions.

Some advocate taxing U.S. companies' worldwide income at the current 35 percent rate and closing tax loopholes.

Others propose a worldwide system without tax deferrals at a 20 percent tax rate, notes an article in Knowledge@Wharton published by the Wharton School of Business at the University of Pennsylvania. Under this system, U.S. corporations would be taxed on worldwide income.

"The lower the tax rate, the less incentive there is for companies to engage in sophisticated gamesmanship to get around the rate," Victor Fleischer, a professor at the University of Colorado Law School, told the Wharton publication. "The [current] 35 percent sticker price is not doing us any good because no one is paying attention to it."

Republican Congressman Dave Camp has recommended lowering the U.S. tax rate and creating a territorial system. Only income sourced from the United States would be taxed and U.S. companies repatriate foreign earnings tax free.

"The whole debate only exists because the U.S., in theory, has a 'residential' tax system instead of a 'territorial' system like many European countries," Kent Smetters, a Wharton economics professor, told Knowledge@Wharton.

In a territorial system, he explained, taxes are paid to a country for economic activity happening in that country, regardless of citizenship. In the American residential system, the U.S. taxpayer pays the U.S. tax rate, minus any taxes already paid to another country that has a territorial system, regardless of where the income is earned.

Editor's Note: The IRS’ Worst Nightmare — How to Pay Zero Taxes

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