Tax Legislative Activity
Baucus Releases International Reform Proposal
On Tuesday, November 19, Senate Finance Committee Chairman Max Baucus (D-MT) released a staff discussion draft on international business tax reform.
In his statement, Chairman Baucus indicated that today’s international reform draft is intended to be revenue neutral, but reiterated his position that, as a whole, tax reform should raise significant revenue for deficit reduction.
Today’s staff discussion draft draws extensively on previous proposals prepared by House Ways and Means Chairman Dave Camp’s (R-MI) international proposal from October, 2012, and Senate Finance Committee Members Michael Enzi (R-WY) and Ron Wyden (D-OR)’s proposal to overhaul the nation’s international tax system.
In his summary of today’s proposal, Chairman Baucus outlined the goals of reforming America’s international tax system. They include:
- Reduce incentives for U.S. and foreign multinationals to shift profits to low-tax countries, rather than the United States.
- Limit incentives for U.S.-based businesses to relocate abroad.
- Increase the competitiveness of U.S. businesses.
- Eliminate the “lock-out effect” by taxing the foreign income of U.S. businesses either straightaway when earned or not at all.
- Simplify the international tax rules to help ensure an equal playing field.
To achieve these policy goals, the Chairman includes these proposals.
First, tax all foreign income of U.S. companies immediately when earned or it is allowed an exemption from U.S. tax. Specifically, and with limited exceptions, income from selling products and providing services to U.S. customers would be taxed annually, at full U.S. tax rates. Credits would be allowed for taxes paid to foreign jurisdiction. On repatriation, earnings of foreign subsidiaries from periods prior to the effective date of Chairman Baucus’ proposal would be subject to a one-time tax at a reduced rate of, for example, 20 percent and payable over eight years.
Second, Chairman Baucus proposes to eliminate opportunities for companies to avoid U.S. tax. For example, the proposal would limit interest deductions for domestic companies, limit income shifting through intangible property transfers, deny deductions for related party payments arising in a base erosion arrangement, and repeal the domestic international sales corporations rules. His proposal would also prevent foreign investors from utilizing partnerships to avoid U.S. tax, restore withholding taxes on interest paid by domestic corporations to residents of countries not providing similar benefits to U.S. investors, and eliminate international aspects of the “check-the-box” rule.
Finally, the proposal would simplify America’s international tax rules by modernizing the rules applying to overseas banking and insurance businesses and apportion interest expense on a worldwide basis for purposes of matching interest expense to income generated by borrowed funds. The plan would modernize rules addressing foreign investment in U.S. real estate and simply foreign tax credit rules.
More Reform Proposals to Follow
Today’s proposal represents the first in a series of plans that Chairman Baucus intends to release over the coming days. We expect the Chairman to release two more this week, one tomorrow and another on Thursday. It is expected that the next drafts will cover tax administration and cost recovery issues.