Baucus Proposes International Tax Reform But Future Action Remains Uncertain

By :: November 19th, 2013

In an effort to jumpstart moribund tax reform efforts, Senate Finance Committee Chairman Max Baucus (D-MT) is suggesting major changes in the way U.S.-based multinational corporations are taxed on their overseas income.

The plan is quite specific (even including legislative language and a 90-page technical summary) but it is not a formal proposal and leaves many controversial issues unresolved. Normally, the chair of a tax-writing committee would release a “chairman’s mark” for the panel to consider. Baucus calls today's document a “staff discussion draft” and is asking for public comments by mid-January.

According to the plan, passive income from overseas activities would continue to be taxed at U.S. rates. Most income from the sale of goods and services overseas would also be taxed at full U.S. rates. The draft would end the practice of deferral that allows firms to avoid U.S. tax on foreign earnings until they bring those profits home. However, income that is currently parked overseas would be taxed at a 20 percent rate payable over 8 years.

Baucus would move the U.S. closer to a territorial system favored by many multinationals and GOP lawmakers. Under such a system, income is taxed in the jurisdiction where it is earned rather than by the firm's home country. While the plan does not fix a specific tax rate, staffers say Baucus is aiming to reduce the corporate rate from 35 percent to about 30 percent.

But in the Baucus plan, this shift closer to a territorial tax comes at a price. To limit the ability of multinationals to game the system, the plan would impose a stiff minimum tax on income earned overseas by foreign affiliates of U.S. parent companies. Firms would be eligible for U.S. tax credits to offset taxes they pay to other countries, as they are today.

The minimum tax has generated widespread interest among independent tax experts and multinationals. My former Tax Policy Center colleague Rosanne Altshuler, now at Rutgers University, has co-authored one idea. President Obama and House Ways & Means Committee Chairman Dave Camp (R-MI) have proposed others. However, Baucus did not settle on a single plan. Rather he suggests two alternative versions.

Unfortunately, the draft does not fully resolve other international tax issues, including the ability of firms to avoid tax by arbitraging the differences between U.S. and foreign tax law. Some of these techniques, which involve licensing intellectual property in low-tax jurisdictions, have made it possible for firms such as Google and Apple to largely avoid paying tax. The minimum levy would impose some tax on income multinationals shift to tax havens but the rate would still be lower than on domestic income.      

The Baucus plan would make big changes to international tax law, and is sure to be extremely controversial. It creates big winners and losers in the corporate world. And while it appears to have support of Finance Committee Democrats, Republicans are unenthusiastic. The panel's senior Republican, Orrin Hatch (R-UT), said he urged Baucus to delay even releasing the draft until after budget talks conclude next year.  It is not clear how Baucus plans to proceed with the proposal though it seems unlikely that Congress would be willing to tackle international reform as a free-standing bill any time soon.

In the House, Camp has been working for years to develop his own reform plan and had vowed to roll out his own version this fall. However, the House leadership appears to have put the measure on the back burner, unwilling to let tax reform distract from its top priority--ongoing opposition to the Affordable Care Act.

It is not clear how Baucus will proceed from here. He is expected to offer some additional staff drafts for other pieces of reform in the coming days, including some domestic business tax changes. Baucus says  business tax reform should raise the same amount of money as current law, and is not intended to boost federal revenues over the long-run. However, the tax on money now sitting overseas could generate new revenue inside the 10-year budget window.  

Today’s draft is an important step forward by advancing the discussion about how to fix the very broken international tax system. It remains to be seen whether it will move us closer to real tax reform any time soon.

4Comments

  1. Eugene Patrick Devany  ::  6:00 pm on November 19th, 2013:

    An “optional” 2% tax on average net wealth (excluding $15,000 cash and $500,000 retirement funds) could be paired with a flat 8% income tax (and no payroll taxes) for about 95% of the population. In the alternative, a higher 26% individual income tax rate (plus deferred capital taxes on gains, gifts and estates and no wealth tax) could be paid by anyone (but they would likely be very, very rich). A 4% VAT on business would enable a reduction of the C corporation rate to 8% and elimination of payroll taxes (so combined business tax revenue and consumer prices remain about the same).

    The payroll earnings tax base has been shrinking compared to both net wealth and sales tax bases. Tax base growth can provide funds to pay down the debt without raising the low 2-4-8 rates.

  2. Footnotes: Baucus Tries to Get Tax Reform Rolling; China To Try Useful GDP Accounting; JPM Settles For $13B | 11.19.13 : ParrottCPA News  ::  6:25 pm on November 19th, 2013:

    […] Baucus Proposes International Tax Reform But Future Action Remains Uncertain [TaxVox] […]

  3. Vivian Darkbloom  ::  3:40 am on November 20th, 2013:

    “Baucus would move the U.S. closer to a territorial system favored by many multinationals and GOP lawmakers. Under such a system, income is taxed in the jurisdiction where it is earned rather than by the firm’s home country.”

    The second sentence quoted above is correct, but not the first. Under the Baucus proposal, income earned abroad, whether from goods or services sold to US customers or foreign customers, would be subject to immediate US tax, only sometimes at moderately lower rates. Taxing all income immediately, wherever earned, is moving away from a territorial system, not toward it.

  4. Michael Bindner  ::  1:30 am on November 21st, 2013:

    Nothing opposed by the largest firms will ever pass, hence the silence on the intellectual property issue. It would be delightful if this were part of a larger bill – one that dealt with carried interest and which, in exchange for a repatriation holiday, increased dividend and capital gains rates at the same time – letting the investors pay for the change. I still like the alternative of dropping the corporate income tax, payroll taxes (except the Social Security employee payroll tax) and low rate income taxation, and the taxation of business income through the income tax – replacing it with some form of consumption taxation – like a VAT and a VAT-like net business receipts tax (filed by employers rather than paid by consumers and having offsetting deductions).