The House Ways and Means Committee Chair proposes reform of corporate tax code.
House Ways and Means Committee Chairman Dave Camp is set to release his proposal for a change in the US corporate tax code to a territorial system. One of the arguments against another tax holiday for US corporations to bring home cash stashed overseas is that many politicians, including the president, want something more permanent. Camp’s new proposal is a step in this direction.
Rep. Camp, a Republican from Michigan, has proposed shielding nearly 95 percent of corporate profits held offshore from taxation in the US. The proposal is seen as revenue-neutral and lowers the top rate for corporations to 25 percent. A territorial tax system is something companies like GE, P&G and Caterpillar have been advocating for some time. The argument of many is that existing US corporate tax laws have developed into a patchwork of complex, inefficient and unfair provisions, or loopholes as the Obama Administration calls them, which impose burdensome costs on business. As a result US MNCs have adopted strategies to reduce overall tax exposure and increase profits, including moving their operations overseas. Other strategies used to minimize taxation include corporate inversions, transfer pricing, earnings stripping, and special leasing arrangements.
“We’re starting with this piece [draft report] right now because we’re really out of step with the rest of the world,” Rep. Camp told CNBC. “We have virtually the highest corporate rate in the industrialized world. We’re the only country left with this worldwide system.”
There are generally considered to be two types of tax structures, “worldwide,” which the US has and territorial, which most of the rest of the world has. The US tax system is mostly a worldwide system where companies registered as US domestic companies are subject to taxation on all income regardless of where income is earned. In a territorial structure, the profits are only taxed by the country where the income is earned.
As it stands, the current system puts uncompetitive cost burdens on US corporations with foreign operations, according to critics. It “really penalizes companies that are doing business worldwide that are American companies,” Rep. Camp told CNBC.
Rep. Camp said that while he supports any solution that brings overseas cash home, he is more supportive of a permanent fix vs. another tax holiday like another HIA 2.0 (see related story here). “I think we ought to do more than just a holiday but fix it permanently,” he said. “That’s what [the proposal] does. We did do that [tax holiday] a few years ago and here we are back again looking at stranded dollars overseas and if we don’t bring them back they’ll be invested there.”
And investing there is what companies like Microsoft are doing. The company this year purchased Luxembourg-based Skype using $9.2bn of its reported $42bn in offshore cash (see related story here). Other deals include, according to S&P, include Liberty Global’s $4.5bn purchase of German cable operator Kabel Baden-Wurttemberg, and GE Energy’s $3.2bn acquisition of a 90 percent stake in French equipment manufacturer Converteam Group SAS. All told, S&P said, S&P 500 companies “will likely record an all-time annual high for foreign acquisitions of more than $85 billion, exceeding the previous annual record of $81 billion set in 2007.”
It’s arguable that companies wouldn’t still be making foreign acquisitions despite the tax structure. But the cash could be invested in the US if it were here, as Rep. Camp contends.