Bloomberg News

Baucus-Camp Plans Fail to Converge on U.S. Multinationals: Tax

July 10, 2013

As the top tax writers in Congress travel the country to tout their effort to revamp the code, one key element still has them on roads that don’t quite meet: how to tax big multinational companies.

Michigan Republican Dave Camp, who runs the House Ways and Means Committee, says the U.S. should switch from a worldwide tax system, where companies are taxed on profits earned anywhere, to a territorial system that taxes few profits earned outside the U.S. -- an idea supported by the 3M Co. (MMM:US), the lawmakers’ first stop on the tax reform tour this week.

Camp’s counterpart, Senate Finance Committee Chairman Max Baucus, a Montana Democrat, has stopped short of endorsing that approach, suggesting instead that a “hybrid” system that takes elements of each concept may be the way to go.

There’s little sign so far of how the two men and their committees could forge a compromise on a slice of the code that is at the heart of how and where companies like Apple Inc. (AAPL:US) and General Electric Co. (GE:US) structure some operations and pay taxes, Bloomberg BNA reported.

Camp and Baucus have agreed in public statements that the corporate tax code hurts business and needs to be updated to keep more companies from moving operations overseas. A Senate subcommittee estimates U.S. companies hold $1.7 trillion overseas of earnings from operations.

The chairman of the Ways and Means Committee working group that examined the issue, Republican Representative Devin Nunes from California, said lawmakers seemed to have some consensus on the issues with the system as currently set up, yet he couldn’t detect the contours of a compromise.

“I think right now, it’s too early to say,” Nunes said.

Alcoa to 3M

The issue of how to tax multinationals is one of the biggest challenges in tax reform. International tax is one of the most complicated elements of the Internal Revenue Code, practitioners said. It is also important enough to big companies, such as 3M, Alcoa Inc. (AA:US) and Procter & Gamble Co. that they have told Congress they are willing to give up corporate tax deductions in order to achieve a more competitive international tax system and lower corporate tax rates.

“Many corporations have different interests,” said Eric Toder, an analyst at the non-partisan Tax Policy Center.

Generally, companies with significant overseas operations want to avoid the tax that hits them if they repatriate profits from active businesses to their U.S. operations, he said. Lawmakers on both sides of the debate agree that a repatriation tax can cut down on potential business investment in this country.

Hybrid Coming

The corporate world is pushing for a territorial system, Toder said. Because no country has a pure territorial or worldwide system, the question is really a technical one of how to set up a system that perhaps leans more toward territorial -- to a point, he said.

Multinational corporations can avoid paying U.S. income tax by conducting operations through a foreign-chartered subsidiary that re-invests profits overseas, the Congressional Research Service said in December. The tax deferral feature adds an element of territoriality to the U.S. system, the group said.

Representative Kevin Brady, a Texas Republican, told BNA in April he was optimistic lawmakers could agree on a “hybrid” solution that is more territorial and also taxes some worldwide profits. Brady, a senior member of the Ways and Means Committee, said chances were better than the rhetoric might suggest.

Many Democratic and Republican lawmakers agree that the corporate tax system has evolved in a way that puts the U.S. at a competitive disadvantage. The top corporate rate is 35 percent and climbs to 39 percent when combined with state and local taxes; most other industrialized nations use a territorial-type system and have lower tax rates as well.

Ideas Floated

Canada trimmed its corporate tax rate, including national and provincial taxes, to 26 percent from 36.1 percent in 2006. Germany cut its rate to 29.55 percent from 38.34 percent. The U.K. reduced its rate to 23 percent from 30 percent, KPMG International says.

Still, a May Government Accountability Office report says the effective rate for U.S. corporations was 12.6 percent in 2010 once various tax breaks are considered, sharply less than the statutory rate triggering the complaints.

Tax experts have floated several ideas for moving to a more territorial system, if not a pure one.

In a 2001 paper published by the American Enterprise Institute, Harry Grubert and John Mutti recommended exempting dividends from foreign subsidiaries to U.S. parent companies and taxing other income such as interest and royalties, according to the Congressional Research Service. That plan would add $7.7 billion annually in federal revenue, the authors predicted.

Modified Plans

The Ways and Means Committee proposed a modified version of the Grubert and Mutti plan, offering some relief for royalties and maintaining revenue neutrality by levying a one-time tax on accumulated earnings. In the long run, that version would lose revenue, CRS said.

The Finance Committee, in a paper prepared by Democratic and Republican staff, outlined possibilities including exempting 95 percent of dividends a foreign subsidiary pays its U.S. parent. At that rate, expenses related to exempt dividends and gains could be made tax-deductible, staff said.

Alternatively, Congress could repeal the tax deferral already in place, taxing all earnings while continuing to allow a credit for foreign taxes paid, the committee reported. The Obama administration has proposed limits on deferral.

To contact the editor responsible for this story: Cesca Antonelli at fantonelli@bloomberg.net


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW

Companies Mentioned

  • MMM
    (3M Co)
    • $146.69 USD
    • -0.15
    • -0.1%
  • AAPL
    (Apple Inc)
    • $100.96 USD
    • -0.83
    • -0.82%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus