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Draft Bill Would Switch U.S. to Territorial Corporate Taxation System, Lower Rates

Friday, October 28, 2011
Sandler, Travis & Rosenberg Trade Report

House Ways and Means Committee Chairman Dave Camp, R-Mich., released Oct. 26 a discussion draft of legislation reforming the way the U.S. taxes corporate income earned overseas. According to a press release from Camp’s office, this draft would make a “fundamental change in the way the United States taxes cross-border activity” by shifting the U.S. from a worldwide system to a territorial-based system that “exempts 95 percent of overseas earnings from U.S. taxation when profits are brought back to the United States from a foreign subsidiary.” The draft would also reduce the corporate tax rate by ten percentage points to 25%, “bringing it in line with the average of countries in the Organization for Economic Cooperation and Development” and “making the United States a more attractive place to invest and create jobs.”

In announcing the draft Camp said current U.S. international tax laws are outdated, having been written 50 years ago “when the United States accounted for 50 percent of the global economy and had no serious competition from others.” These laws require that “when U.S.-based companies try to bring profits back home, they must pay U.S. taxes on top of the tax they already pay in the foreign market,” Camp said. As a result, “it is cheaper for these companies to reinvest profits overseas instead of creating jobs here.”

A fact sheet on the discussion draft states that it includes a number of anti-abuse rules to prevent erosion of the U.S. tax base and help make the participation exemption system a revenue neutral component of tax reform. For example, income shifting rules would prevent U.S. companies from avoiding U.S. tax by transferring highly valuable intangible property to foreign companies that pay little or no tax. Anti-deferral rules would immediately and fully tax domestic companies on the passive income of foreign companies. There are also rules to prevent U.S. companies from borrowing heavily in the U.S. (generating tax deductions to reduce taxes on their U.S. income) to finance income from overseas operations (which is eligible for the 95% exemption).

The discussion draft also provides that all pre-effective date, tax-deferred foreign earnings of foreign companies owned by 10% U.S. shareholders would be taxed once at a 5.25% rate, whether or not they are repatriated. U.S. companies could pay this tax in up to eight annual installments, and these earnings could then be brought back to the U.S. under the proposed exemption system.

The Ways and Means Committee will seek feedback from a broad range of stakeholders, taxpayers, practitioners, economists and members of the public on how to improve this proposed set of rules.

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