Senate Finance Committee Chairman Max Baucus (D-MT) has been working diligently in recent months in anticipation of an overhaul of the U.S. tax code.
In recent weeks though, momentum for tax reform has slowed considerably with Republican leadership asking Baucus's counterpart in the House, Dave Camp (R-MI), to put his legislation on hold.
Nevertheless, Baucus is moving ahead with his plans and yesterday released a draft proposal. Here's what's in it:
Corporate Tax Rate
- Reduce to under 30%, from current 35%
- Prevents companies from shifting income from intangible property to low tax jurisdictions
Baucus's plan is just a draft proposal so it is not specific legislation yet. He has not decided the exact corporate rate, instead saying it will be less than 30. Both sides favor lowering the corporate rate, which is one of the highest in the world so the U.S. is not at a disadvantage relative to other nations. However, doing so also reduces revenues. Baucus hopes to make up for some of that lost revenue by limiting how much companies can transfer their intangible property (patents, copyrights, etc.) to low-tax countries to avoid paying U.S. taxes on them.
Taxes on Current Profits Accumulated and Deferred Overseas
- Taxed at 20% - Payable over 8 years
At the moment, U.S. companies are holding more than a trillion dollars offshore, refusing to repatriate it in order to avoid paying taxes. Depending on what the companies do with the money (dividends vs. investment), repatriation could provide a nice stimulus to the U.S. economy. However, most companies are holding out for a tax holiday in which they can bring the money back untaxed. The federal government does not want to do this because it believes profits accumulated by U.S. companies abroad should be taxed here. Baucus's proposal allows companies to bring back those profits and not face the full corporate tax rate while also allowing them to spread out those payments over eight years. It would also give Treasury a boost in revenues.
Future Overseas Earnings (2 Proposals)
1. All overseas income is exempted from U.S. taxes if the company is already paying 80% of their potential U.S. tax bill to foreign host government. 2. 40% of overseas income is exempted from U.S. taxes while the remaining 60% is taxed at the corporate rate, with a credit for the foreign tax bill.
How to deal with foreign earnings of U.S. companies is a controversial topic. If tax reform happens, the government does not want companies to continue keeping profits overseas to avoid U.S. taxes. It wants a solution. Baucus is presenting two options. Both include measures to prevent U.S. companies from paying high tax bills at home and in the host country while also ensuring that companies cannot avoid taxes altogether.
Most importantly, by regulating how foreign earnings are taxed whether or note they are repatriated, Baucus's proposal eliminates the risk of companies accumulating profits abroad and refusing to bring them back.
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