Baucus Floats Ways to Close Tax Loopholes for Overseas Businesses

Baucus: No deal on tax cuts until after Thanksgiving.
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Sarah Mimms and Billy House
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Sarah Mimms and Billy House
Nov. 19, 2013, 9:31 a.m.

Sen­ate Fin­ance Com­mit­tee Chair­man Max Baucus on Tues­day un­veiled a sweep­ing pack­age of pro­posed tax-code changes tar­get­ing cor­por­a­tions that do busi­ness over­seas, in­clud­ing call­ing for a min­im­um tax on the in­come they earn world­wide.

The plan is the first of three drafts touch­ing on re­vis­ing as­pects of the tax sys­tem that Baucus is to re­lease this week. It comes after House Re­pub­lic­ans last week in­dic­ated their tax-re­form ef­forts — led by Ways and Means Com­mit­tee Chair­man Dave Camp — have been put on hold, at least for the rest of the year, and the pro­spect of any ac­tu­al move­ment to­ward a tax re­vamp soon is un­likely.

Baucus’s re­lease of his pro­pos­al for “in­ter­na­tion­al tax re­form” also fol­lows a closed-door meet­ing with oth­er sen­at­ors on the Fin­ance Com­mit­tee. It is a re­sponse to the gen­er­al no­tion that cur­rent law cre­ates too many in­cent­ives for mul­tina­tion­al cor­por­a­tions to in­vest and cre­ate jobs over­seas. About $2 bil­lion in U.S. cor­por­ate earn­ings are es­tim­ated to be parked over­seas.

The Baucus draft de­scribes some of the ob­ject­ives of the pro­pos­als, which in­clude re­du­cing in­cent­ives for U.S. and for­eign mul­tina­tion­als to in­vest in or shift profits to low-tax for­eign coun­tries; re­du­cing in­cent­ives for U.S.-based busi­nesses to move abroad; and sim­pli­fy­ing the tax rules so that firms with the most soph­ist­ic­ated tax ad­visers are not ad­vant­aged.

Un­der cur­rent law, U.S. com­pan­ies owe taxes at a full fed­er­al rate of 35 per­cent on all in­come earned world­wide. But they can de­fer U.S. tax­a­tion un­til they re­pat­ri­ate the money. Baucus’s plan to re­struc­ture the in­ter­na­tion­al tax sys­tem would lower the cor­por­ate rate by an un­spe­cified amount.

But the draft in­cludes two op­tions for tax­ing in­come from products and ser­vices sold in­to for­eign mar­kets.

One would be a min­im­um tax that im­me­di­ately taxes all such in­come at 80 per­cent of the U.S. cor­por­ate tax rate with full for­eign tax cred­its, coupled with a full ex­emp­tion for for­eign earn­ings upon re­pat­ri­ation. An­oth­er is a min­im­um tax that im­me­di­ately taxes all such in­come at 60 per­cent of the U.S. 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.

Some cor­por­a­tions have been call­ing for a “tax-re­pat­ri­ation hol­i­day” to bring those stock­piled earn­ings parked over­seas back to the coun­try. The pro­pos­als in the draft don’t do that. But they also would make earn­ings of for­eign sub­si­di­ar­ies from peri­ods be­fore the ef­fect­ive date of the pro­pos­al that have not been sub­ject to U.S. tax sub­ject to a one-time tax at a re­duced rate of, “for ex­ample, 20 per­cent pay­able over eight years,” it says. That could pro­duce a one­time rev­en­ue shot for the U.S. Treas­ury of about $200 mil­lion, ac­cord­ing to some es­tim­ates.

The two oth­er draft pro­pos­als Baucus is ex­pec­ted to re­lease this week will touch on tax ad­min­is­tra­tion and cap­it­al-cost re­cov­ery.

Treas­ury Sec­ret­ary Jac­ob Lew said at a Wall Street Journ­al con­fer­ence Tues­day morn­ing that he had dis­cussed the draft with Baucus on Monday, and he praised the chair­man for put­ting for­ward a plan that “shares some sig­ni­fic­ant char­ac­ter­ist­ics with the pres­id­ent’s frame­work,” while in­clud­ing pro­vi­sions that he hopes will find sup­port among both Re­pub­lic­ans and Demo­crats.

Lew said that such a plan to “deal with the dis­par­ity between the U.S. and in­ter­na­tion­al tax rates” could provide a “shot in the arm” to the Amer­ic­an eco­nomy. Lew sug­ges­ted us­ing that one­time rev­en­ue to make crit­ic­al in­vest­ments in in­fra­struc­ture. “It would build a found­a­tion for a strong growth and job-cre­ation eco­nomy,” he said.

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