Baucus proposed international tax reform but future action remains uncertain
In an effort to jumpstart moribund tax reform efforts, Senate Finance Committee Chairman Max Baucus (D-MT) is suggesting聽聽in the way U.S.-based multinational corporations are taxed on their overseas income.
The plan is quite specific (even including legislative language and a 90-page technical summary) but it is not a formal proposal and聽leaves many controversial issues unresolved. Normally, the chair of a tax-writing committee would release a 鈥渃hairman鈥檚 mark鈥� for the panel to consider.聽Baucus calls today鈥檚 document聽a 鈥渟taff discussion draft鈥� and is asking for public comments by mid-January.
According to the plan, passive income from overseas activities would continue to be聽taxed聽at U.S. rates. Most income from the sale of goods and services overseas would also be taxed at full U.S. rates.聽The draft would end the practice of deferral that allows firms to avoid U.S. tax on foreign earnings until they bring those profits home. However, income that is currently parked overseas would be taxed at a 20 percent rate payable over 8 years.
Baucus would move the U.S. closer to a territorial system favored by many multinationals and GOP lawmakers. Under such a system, income is taxed in the jurisdiction where it is earned rather than by聽the firm鈥檚聽home country. While the plan does聽not fix a specific tax rate, staffers say Baucus is聽aiming to reduce the corporate聽rate from 35 percent to about 30 percent.聽
But in the Baucus plan, this shift closer to a territorial tax聽comes at a price. To limit the ability of multinationals to game the system, the plan would impose a stiff minimum tax on income earned overseas by foreign affiliates of U.S. parent companies. Firms would be eligible for U.S. tax credits to offset taxes they pay to other countries, as they are today.
The聽minimum tax聽has generated widespread interest among independent tax experts and multinationals. My former Tax Policy Center colleague Rosanne Altshuler, now at Rutgers University, has co-authored聽. President Obama and House Ways & Means Committee Chairman Dave Camp (R-MI) have proposed others. However, Baucus did not settle on a single plan. Rather he suggests two alternative versions.
Unfortunately, the draft does not fully resolve聽other聽international tax issues, including the ability of firms to avoid tax by arbitraging the differences between U.S. and foreign tax law. Some of these techniques, which involve聽licensing intellectual property in low-tax jurisdictions, have made it possible for firms such as Google and Apple to largely avoid paying tax.聽The minimum levy聽would impose some tax聽on income multinationals聽shift to tax havens but the rate would still be lower than on domestic income. 聽聽聽聽聽
The Baucus plan would make big changes to international tax law, and is sure to be extremely controversial. It creates big winners and losers in the corporate world. And while it appears to have support of Finance Committee Democrats,聽Republicans are unenthusiastic. The panel鈥檚 senior Republican, Orrin Hatch (R-UT),聽聽he urged Baucus to delay even releasing the draft until after budget talks conclude next year.聽 It is not clear how Baucus plans to proceed with the proposal though it seems unlikely that Congress would be willing to tackle international reform as a free-standing bill any time soon.
In the House,聽Camp聽has been working for years to develop his own reform plan and had vowed to roll out his own version this fall. However, the House leadership appears to have put the measure on the back burner, unwilling to let tax reform distract from its top priority鈥搊ngoing opposition to the Affordable Care Act.
It is not clear how Baucus will proceed from here. He is expected to offer some additional staff drafts for other pieces of reform in the coming days, including some domestic business tax changes. Baucus says聽 business tax reform should raise the same amount of money as current law, and is not intended to boost federal revenues over the long-run. However, the tax on money now sitting overseas could generate new revenue inside the 10-year budget window. 聽
Today鈥檚 draft is an important step forward by advancing聽the discussion about how to fix the very broken international tax system. It remains to be seen whether it will move us聽closer to real tax reform聽any time soon.
