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Baucus Issues Contentious US International Tax Reform Draft

by Mike Godfrey, Tax-News.com, Washington

22 November 2013


Senate Finance Committee Chairman Max Baucus (D – Montana) has released a discussion draft that outlines options for United States international tax reform, and has immediately run up against opposition from Republican leaders in Congress, as well as from the corporate sector.

Baucus's proposals are intended, he said, to detail "ideas on how to reform international tax rules to spark economic growth, create jobs, and make US businesses more competitive." He is requesting comments from interested parties to the discussion draft, the first of a series to be issued, by January 17, 2014.

The draft repeals the deferral system for the earnings of foreign subsidiaries of US companies and replaces it with what is said to be a more competitive system under which all such income is either taxed immediately when earned or exempt from US tax, after which no additional US tax is due.

In particular, passive and highly-mobile income and income from selling products and providing services to US customers would be taxed annually at full US rates, and the discussion draft includes two options that apply an annual minimum tax to income from products and services sold into foreign markets.

One option would apply immediately, to tax all such income at a minimum rate (80 percent of the US corporate tax rate with full foreign tax credits), coupled with a full exemption for foreign earnings upon repatriation, while the second would immediately tax all such income at a lower minimum rate (60 percent of the US corporate rate) if derived from active business operations but at the full US rate if not, coupled with a full exemption for foreign earnings upon repatriation.

In addition, historical earnings of foreign subsidiaries that have not been subject to US tax would be subject to a one-time tax at a reduced rate of, for example, 20 percent payable over eight years. Credits are allowed for taxes paid to foreign jurisdictions to the extent the associated income is subject to US tax.

Amongst other provisions, the discussion draft limits income shifting through intangible property transfers; denies deductions for related party payments arising in a base erosion arrangement; and limits interest deductions for domestic companies to the extent that the earnings of their foreign subsidiaries are exempt from US tax and the domestic companies are over-leveraged when compared to their foreign subsidiaries.

While Baucus believes tax reform as a whole should raise significant revenue for deficit reduction, the international tax reform discussion draft is intended to be long-term revenue neutral. "While not a final plan," he added, "the discussion drafts are intended to spur a conversation about areas where Republicans and Democrats may be able to reach agreement on how to fix the broken tax code."

However, his overall revenue-raising objective for tax reform, which ties in with the Democratic Party previously-expressed view, immediately raised the hackles of Republicans, who view revenue-neutral tax reform as an opportunity to reduce tax rates. It reinforced doubts over whether tax reform can now receive bipartisan support.

Dave Camp (R – Michigan), Chairman of the House Ways and Means Committee, who has been carrying forward his own tax reform initiative in conjunction with Baucus, was merely able to "applaud Baucus for his continued commitment to advancing tax reform forward amongst his Senate colleagues."

In other comments partisan views came to the front. The Ways and Means Committee's Ranking Member Sander Levin (D – Michigan) agreed with Senator Baucus that "tax reform should raise significant revenue," but Senate Finance Committee Ranking Member Orrin Hatch (D – Utah) commented that "the bipartisan desire to overhaul our tax code has become mired in the partisan desire by some to raise taxes under the guise of so-called tax reform."

On the other hand, comments from US business associations were focused specifically against the discussion draft's international tax reform proposals. For example, the Let's Invest for Tomorrow (LIFT) America Coalition, which has campaigned against the US' current "worldwide" international tax system, stated that "instead of moving the US closer to a more competitive tax system, the draft's provisions actually take the nation further away from the pro-growth, pro-jobs business tax reform that American companies and workers are seeking."

The cornerstone of reform, it added, should be "a modern, hybrid (territorial) international tax system – similar to the one used by our trading partners – that would promote increased US investment, while protecting America's tax base."

Furthermore, the Business Roundtable concluded that "Baucus's goal of increasing the ability of US businesses to compete abroad is critical. Unfortunately, we do not believe that the international discussion draft supports that goal because it would make many American companies even less competitive than their non-US counterparts."

TAGS: Finance | tax | business | corporation tax | tax credits | multinationals | tax rates | United States | tax reform

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