Corporate “Tax Dodging” in Spotlight as Tax Reform Timing in Question
It is becoming increasingly clear that the timing of tax reform is largely tied to what happens with the House Blueprint. Assuming the proposal moves forward largely as is, the House is aiming to wrap up debate and successfully enact tax reform by August. That said, the likelihood that final action on tax reform – if it happens – slipping until the end of the year appears to be a possibility growing more likely by the day, as the politics of tax reform seem to be slowing the process. In fact, while Chairman Kevin Brady (R-TX) is still proceeding publicly as though Congress will be able to enact tax reform by August, Senate Majority Leader Mitch McConnell (R-KY) and Senate Finance Committee Chairman Orrin Hatch (R-UT) last week both expressed skepticism that tax reform will get done by August, suggesting that it could slip to 2018. Notably, the Administration did not cede this, but also would not rule it out.
Note too, a large part of the Blueprint’s success will depend on whether it receives support from President Trump – especially as relates to the Border Adjustable Tax (BAT). Though the President walked back his earlier comments suggesting that the BAT may be overly-complicated, he has at the same time failed to fully embrace the concept (or at least the concept as proposed in the Blueprint). Moreover, while President Trump’s recent address to a joint session of Congress acknowledged the need to encourage U.S. exports, the President’s advisors (chiefly Secretary of Commerce William Ross) made clear that he was not endorsing BAT. Many considered this a loss for Speaker Ryan and the House proposal, as the BAT needs buy-in from the Administration if it is ultimately going to move forward in the tax reform debate. However, the Trump Administration has another opportunity to express (or withhold) its support of BAT: the “skinny budget,” which is expected this week (potentially as early as March 15). While nothing has been confirmed, it appears that President Trump may be more in line with the Senate in questioning whether a BAT is appropriate and effective. That said, there still appears to be a divide even with the White House, with the political staff favoring the BAT and the policy staff generally opposing it.
In the interim, as the tax reform debate continues on, Senators Bernie Sanders (I-VT) and Brian Schatz (D-HI) have introduced the Corporate Tax Dodging Prevention Act – “a bill to eliminate tax breaks that encourage corporations to shift jobs and profits offshore.” Rep. Jan Schakowsky (D-IL) introduced a companion bill in the House. The bill, which is largely consistent with the Democrats’ approach to inversions over the last several years, follows the release of a report by The Institute on Taxation and Economic Policy, which shows that 100 large corporations paid zero or less in federal income taxes at least once over the last decade.
To crack down on “corporate tax dodging,” the bill would:
- End the rule allowing deferral of U.S. income tax on offshore profits – though American corporations would still be allowed a credit that reduces their federal income tax liability by an amount equal to income taxes paid to foreign governments on these profits;
- Impose a one-time, 35 percent tax on the nearly $2.5 trillion in offshore profits – a tax that would be payable over an eight-year period;
- Disallow the use of foreign tax credits generated by profits earned in one country against U.S. income tax on profits earned in another country;
- Prevent a corporation from claiming to be foreign if its management and control operations are located in the U.S.;
- Tax inverted companies as American corporations so long as they are still majority-owned by the owners of the American party to the merger or acquisition;
- Disallow a U.S. affiliate of a foreign-owned multinational corporation from deducting interest expenses that are disproportionate to its share of income of the entire corporate group (i.e., the entire group of corporations owned by the same parent company) – though the U.S. affiliate could choose instead to be subject to a different rule limiting deductions for interest payments to ten percent of its income;
- Prevent large oil companies from “disguising” royalty payments to foreign governments as foreign taxes.
While the move comes as no surprise (Senator Sanders has introduced similar legislation previously), this and other such legislation are unlikely to move through the Congress at this time. That said, it will be important to keep apprised of such legislation from leading progressives in the Senate.