Under U.S. generally accepted accounting principles (“GAAP”), publicly traded U.S. multinationals do not record U.S. tax expense on undistributed earnings of non-U.S. subsidiaries where the earnings are considered to be permanently reinvested outside the U.S.
For example, if a U.S. multinational earns $100 in a foreign jurisdiction that has no local income tax (i.e., a tax haven), the full $100 is included in the earnings reported to the public. Ultimately, the foreign earnings will be subject to U.S. federal and state income taxes. However, no U.S. tax expense is currently recorded if the earnings are designated as being permanently invested outside the U.S. These earnings will ultimately be subject to U.S. taxes. Even though it makes sense to accrue U.S. taxes as these earnings are generated, the accounting rules do not require such accrual.
Publicly traded U.S. multinationals primarily focus on earnings reported to shareholders. Because GAAP rules do not require the booking of U.S. tax expense on undistributed earnings of non-U.S. subsidiaries, U.S. multinationals can increase their earnings per share by simply moving their profits out of the U.S. to a low tax foreign jurisdiction.
If Congress were to force a change in the GAAP rules so that U.S. multinationals had to record U.S. federal and state income taxes on all worldwide earnings (net of applicable foreign tax credits), regardless if the foreign earnings were undistributed, it would significantly reduce the incentive to shift profits (and jobs) abroad.
Interestingly, this would not be a tax increase at all. It would merely be an improvement in the calculation of earnings reported to shareholders. The earnings would reflect a tax that will ultimately be paid. The U.S. multinationals would continue to pay the same amount of U.S. tax as prior to the change. The companies would merely be booking an expense and a liability that will ultimately come due, and the change would substantially reduce the incentive to shift profits and jobs overseas.