International Tax Status (Feb. 11)

Mike & Co.  —

One thing the two parties agree is that international tax reform is a fiscally necessary issue to take up — that Uncle Sam is leaving hundreds of billions of dollars on the table overseas annually.   But they would also generally agree that it is not going to get done this year.

Under current law, those profits are subject only to federal taxes if they are returned, or repatriated, to the U.S. where they face a top rate of 35 percent.  Many companies avoid U.S. taxes on those earnings by simply leaving them overseas.

There is bipartisan activity on the issue in both houses of Congress. Obama has a major reform proposal on the table.  So is this the year, in the year of surprises?

 

Best,

 

Dana

 

Reforms in the area of international tax deal with both the repatriation of foreign-derived profits and the issue of corporate inversions.  Testifying today, Treasury Secretary Jack Lew encouraged the parties in Congress to overcome their differences on both, which he believes surmountable:  “I just want to underscore the urgency of dealing with inversions … We can’t wait a year to deal with this,” Lew said during a Senate Finance hearing on the Obama administration’s budget. Congress could pass narrow legislation on inversions, he said, even if broader reform of the international system is preferable.

 

Stirrings in the Senate

 

Sen. Schumer also announced today that he is in contact with Speaker Ryan about coming to an agreement on repatriating corporate profits.  They were unable to come to an agreement last year on a similar measure put forth as part of a larger reform effort.  Schumer said today: “We’re trying to bridge over, of course, the divide between existing proposals.  I remain at the table ready to work.”

 

One of the key differences between the parties concerns whether the money raised from tax reform should be turn into government revenue for more spending, or used to pay down the debt or pass tax cuts.  After the Senate Finance hearing yesterday, Chair Hatch said:  “I’m actually working on international, but I just don’t think it’s going to get done this year, because, you know, let’s face it, the Democrats are going to want to raise revenue.  They want money to spend.”

 

At that same hearing, Sen. Shelby pushed a corporate integration plan he is developing to eliminate the double taxation of corporate income by providing corporations a dividend deduction.  He’s awaiting a score by the Joint Committee on Taxation.  Dividend deductions are usually quite expensive and regressive, so it will a feat to attract any Democratic support, especially for him.

Brady’s Push 

Meanwhile, Ways and Means Chair Kevin Brady has said that he wants a vote this year on moving the United States into a territorial tax system, which would permanently exempt US-based businesses from paying taxes on income earned abroad.  He also wants to lower the corporate rate to 20 percent.  In the face of these proposals it is difficult to see what sort of compromise can be found between Democrats and Republicans, as the former may be more preoccupied just keeping alive the idea that foreign profits should be taxed at all. “The goal of these reforms are not to generate more spending,” Brady said. “It’s to bring back real dollars to be reinvested in the United States.”

Brady has been advocating for international tax reform since he took over Ways and Means.  Last month, he spoke with Sen. Hatch and they were both committed to getting something done.  Senior Republicans believe the country’s international tax problems — inversions and Europe going after revenues from U.S. companies among them — are urgent.  But Brady strongly hinted that all that work would be aimed at setting things up for 2017, when Republicans want “pro-growth tax reform under a Republican president.” Perhaps that’s no huge shock, but it does seem to set up something of a disconnect, given all the talk of urgency.

Brady and his supporters have been pushing the idea that American money is either being taxed by other countries or being taken over by foreign competitors in an inversion — typically, when an American company incorporates abroad so its earnings are no longer subject to American taxes.  Brady says the result is an erosion of our tax base and a lock-out effect of American capital being “trapped” abroad that can be solved by fixing our uncompetitive tax code.

Presidential Proposal

The President’s FY 2017 budget contains a surprising source of new revenue to pay for its spending programs – a major piece of international tax policy reform: a six-year, $478 billion public-works program for highway, bridge and transit upgrades, half of it to be financed with a one-time, 14 percent tax on U.S. companies’ overseas profits and a 19 percent rate thereafter.  The issue of companies holding foreign profits at locations abroad, where they are exempt from taxation until repatriated, has vexed policy makers on both sides for some time.  It’s estimated that these profits add up to nearly $2 trillion.

The issue of companies holding foreign profits at locations abroad, thereby exempt from taxation unless those profits are brought home, has vexed policy makers on both sides for some time.  Microsoft Corp., Apple Inc., Google Inc. and five other tech firms now account for more than a fifth of the $2.10 trillion in profits that U.S. companies are holding overseas.  In keeping with the idea that Obama’s final budget is “more politics than policy,” these revenue-gaining proposals are meant to spark discussion more so than be a model for laws going forward.