House Ways & Means Committee chair proposes a 25 percent corporate rate and cuts a raft of subsidies.
House Ways and Means Committee Chairman David Camp released his corporate tax reform proposal on February 26. The discussion draft, which Camp had hoped to float last year, has only one real appeal to MNCs – a tax rate lowered to 25 percent.
“The Camp proposal is the product of a lot of thoughtful thinking and analysis and is very comprehensive,” said William Cavanagh, a corporate tax attorney at Chadbourne & Parke. “The downside of being comprehensive is that there is something in the proposed legislation for everyone to hate.”
One of the proposals that should find support among some US corporations is the proposal to adopt a territorial system and effectively exempt US corporations from US tax on the business income they earn offshore – except for a tax on 5 percent of the dividend when they dividend the money back to the US.
But some companies may find the proposal unappealing; particularly those concerned with protecting overseas earnings. In an effort to prevent US companies from shifting more of their operations offshore, certain foreign earnings that are subject to low foreign tax will be subject to current US tax under the proposed rules. This move could expose the conflict between MNCs who want to ease the hit to deferred offshore earnings and those willing to trade so called “loopholes” for a lower overall tax rate. And financial services firms likely weren’t happy about the proposal to penalize too-big-to-fail banks with a 0.035 percent tax on assets in excess of $500 billion. Private equity and hedge funds probably weren’t happy about the hit to carried interest, which the Rep. Camp said he wanted to “clean up” in a recent Wall Street Journal editorial.
So far, both the major corporate tax lobbies, the LIFT (Let’s Invest for Tomorrow) America Coalition and the RATE (Reforming America’s Taxes Responsibly) Coalition support the proposals, although LIFT expects the proposals to be “improved upon over time.”
Rep. Camp, a Republican, did not table a specific one-off proposal to incentivize MNCs to repatriate overseas cash, per the HIA program in the past, as some had hoped last year. It does list an impressive number of corporate subsidies to be trimmed, however. That’s of little current concern to MNCs who rely on those subsidies. For political reasons, few actually believe any significant corporate tax reform will happen in 2014. (See Losing Hope on US Tax Reform, December 11, 2013.) In fact, Senate Republican leader Mitch McConnell said on February 26 that he saw no chance of reform this year, with mid-term elections looming in November.
The draft includes a host of initiatives for individual taxpayers, and offers a half-reform of the carried interest tax situation in private equity. But the lack of enthusiasm for the plan, and the fact that Rep. Camp is leaving the chairman’s seat this year, means it will most likely die an early death.