Senate Finance Chairman Max Baucus launches international corporate tax trial balloon; no tax holiday included.
If there is anything more remote than actual corporate tax reform happening in the next year or so, it’s the likelihood corporations get a temporary repatriation tax holiday a la 2004. It just isn’t happening and about the only thing that is close, according to new proposals by Democratic Sen. Max Baucus, is actually something that could be worse: a one-time tax on all accumulated (and deferred) overseas earnings.
“Earnings of foreign subsidiaries from periods before the effective date of the proposal that have not been subject to US tax are subject to a one-time tax at a reduced rate of, for example, 20 percent, payable over eight years,” according to Sen. Baucus’s Staff Discussion Draft of his tax proposals.
This one-time tax would generate about $200bn, according to estimates and based on the $2tn or so in cash sitting overseas. This would also be accompanied by an end to “tax deferral” whereby US companies haven’t had to pay taxes on income earned overseas until it’s brought back home.
“The staff discussion draft ends the lock-out effect and replaces the deferral system with a new, more competitive system under which all income of foreign subsidiaries of US companies is taxed immediately when earned or is exempt from US tax, after which no additional U.S. tax is due,” the Baucus draft states.
Sen. Baucus’s proposals also include eliminate the ability of companies to move cash around to lower-tax havens.
While some of the proposals would be hard for corporations to swallow, there are some that might be bring companies and Republicans to the negotiation table. One is that the corporate tax rate itself going forward would be lowered from its high 35 percent to somewhere in the 20s. Sen. Baucus said this cut would be paid for by “broadening the corporate tax base in a manner that is revenue neutral in the long-term” and getting rid of loopholes. Some US company heads have said in the past that they would be happy to give up loopholes for a lower rate.
Sen. Baucus’s staff draft also outlined two options for taxing income from products and services sold into foreign markets:
- A minimum tax that immediately taxes all such income at [80 percent] of the US corporate tax rate with full foreign tax credits, coupled with a full exemption for foreign earnings upon repatriation.
- A minimum tax that immediately taxes all such income at [60 percent] of the US corporate rate if derived from active business operations but at the full U.S. rate if not, coupled with a full exemption for foreign earnings upon repatriation.
The latest proposals also try once again to address the infamous “check-the-box” rule, which allows US companies to strip profits from operations in high-tax countries just by checking a box on an IRS form. Checking the box transforms subsidiaries into what the IRS calls a “disregarded entity.” Eliminating it was also part of a 2010 Obama budget proposal that companies lobbied hard and successfully against. Sen. Baucus proposes eliminating parts of this rule, although they wouldn’t “change the domestic application of the ‘check-the-box’ rules.”
With Democrats and Republicans deadlocked over taxes in general, i.e., Republicans say no new revenue should be raised by tax reform while Democrats insist that tax reform be used to raise money, it’s impossible to say whether the Baucus draft will ever go any further.