Bloomberg News

Camp Territorial Plan Exempts Most Offshore Profits From Tax

November 02, 2011

(Updates with Camp quote in third paragraph and Levin quote starting in 12th paragraph.)

Oct. 26 (Bloomberg) -- U.S. House Ways and Means Committee Chairman Dave Camp will release a long-awaited proposal today to shield 95 percent of corporate profits earned offshore from taxation in the U.S.

U.S. multinational companies, including Caterpillar Inc., Procter & Gamble Co. and General Electric Co., have been pressing for such a change to match the tax systems of most other major economies. The exemption would create a territorial system, removing almost all U.S. taxation of offshore profits.

“We’re out of step with the rest of the world,” Camp, a Republican from Michigan, said today in an interview with Bloomberg Television. “We need to move to this territorial system, which allows our companies to not be double-taxed.”

The proposal will be released later today as a draft instead of as a formal bill, according to a Republican familiar with the plan. It’s a slice of the broader rewrite of individual and corporate U.S. tax laws Camp is seeking. Still, the release marks the first time he has made a detailed proposal on an overhaul of international tax law since he took control of the Ways and Means panel in January.

“It seems to be a European-style territorial tax system,” said Rosanne Altshuler, an economics professor at Rutgers University in New Jersey who has written extensively on international tax policy.

With the 95 percent exemption, companies would pay taxes on 5 percent of their profits earned overseas. That would let the U.S. avoid writing detailed rules for disallowing domestic deductions that support untaxed foreign operations.

Lower Corporate Rate

The proposal assumes the top corporate rate will be lowered to 25 percent from its current 35 percent and would also be revenue-neutral. Camp’s plan would in part offset the undisclosed cost of the territorial plan by requiring companies to repatriate offshore profits at a 5.25 percent rate within eight years.

Under the current U.S. worldwide tax system, multinational companies with headquarters in the U.S. owe taxes on profits they earn outside of the country. They receive tax credits for payments to other governments and can defer the residual U.S. tax until they bring the money home.

The U.K. and Japan have moved to territorial tax systems in recent years, leaving the U.S. system as an outlier.

Democratic Resistance

Camp’s plan will face resistance from some Democrats, who have argued that lower taxes on overseas operations would encourage companies to move operations and profits out of the U.S. When President Barack Obama campaigned in 2008 against tax breaks that ship jobs overseas, he was talking largely about deferral under the current worldwide system.

A territorial tax system, depending on how it’s designed, could be another step in that direction. The features of such a system can affect its impact on companies, and that’s why lobbyists and lawmakers were awaiting Camp’s draft.

Representative Sander Levin of Michigan, the top Democrat on the Ways and Means Committee, said Camp’s territorial tax plan “has to be more than a slogan.”

“We have to say how are we going to avoid tax havens, use of them, how are we going to avoid shifting manufacturing overseas?” he said today on CNBC. “Are we going to get rid of some of the incentives today that help promote manufacturing in the United States of America? We need to answer those questions.”

‘Just the Reverse’

Camp said a shift to a territorial tax system wouldn’t encourage U.S. companies to move investments offshore.

“It’s just the reverse,” he told Bloomberg Television. “The rest of the world has gone to a lower corporate rate and a territorial system of taxation. So our employers are really at a competitive disadvantage when they try to do business around the world.”

Because U.S.-based companies can now defer taxes on overseas income, many have built up stockpiles of offshore profits, and the total parked overseas exceeds $1 trillion. Some of those companies, including Pfizer Inc., Cisco Systems Inc. and Apple Inc., want Congress to let them return the profits to the U.S. at a reduced rate.

They have formed a coalition to lobby lawmakers to support a temporary tax repatriation holiday. Camp has resisted their calls and has insisted that the offshore profits be returned as part of a comprehensive tax-code overhaul.

Repatriation Provision

Camp’s plan includes a so-called deemed repatriation provision that wouldn’t require companies to return the profits to the U.S. It would require them to pay taxes at a 5.25 percent rate as if they had returned the profits.

Because a temporary tax holiday wouldn’t change the underlying system, the congressional Joint Committee on Taxation estimates that it would cost the U.S. almost $79 billion in forgone revenue over a decade. By incorporating repatriation of overseas profits into the territorial plan and making it mandatory, Camp’s plan would generate revenue to help pay for the cost of shifting to a territorial system. It doesn’t cover the cost of reducing the corporate rate to 25 percent.

Congressional scoring rules won’t calculate whether the proposal would lose money after a decade. The temporary proceeds from deemed repatriation could dry up after eight years and make the second decade of Camp’s proposal a revenue-losing tax cut.

Capitalization Rules

If the U.S. moves to a territorial system, there will be concern that companies could use debt -- the interest on which is tax-deductible -- to finance overseas operations that are no longer subject to U.S. tax. Camp’s proposal will include thin capitalization rules to prevent a company from becoming too leveraged in the U.S.

Some aspects of the proposal reflect issues that must still be worked out. For instance, lawmakers must decide how to treat income from intangible assets such as patents. One of three options Camp is offering would be a 15 percent tax on royalty income that would be levied when earned, regardless of location.

Companies in the pharmaceutical and technology industries have been able to move intellectual property out of the U.S. and into low-tax jurisdictions such as Ireland.

Camp is a member of the congressional supercommittee that is charged with identifying $1.5 trillion in savings over a 10- year period by Nov. 23. The panel has considered including a framework for a tax overhaul in its report. Those plans could be affected by Camp’s proposal.

--Editors: Jodi Schneider, Leslie Hoffecker

To contact the reporters on this story: Steven Sloan in Washington at ssloan7@bloomberg.net; Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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