Business Groups Pan Baucus Tax Changes as Uncompetitive

Photographer: Andrew Harrer/Bloomberg

U.S. Senator Max Baucus, a Democrat from Montana and chairman of the Senate Finance Committee, said his plan would provide a “permanent solution” to U.S. international tax rules that encourage companies to leave profits outside the country. Close

U.S. Senator Max Baucus, a Democrat from Montana and chairman of the Senate Finance... Read More

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Photographer: Andrew Harrer/Bloomberg

U.S. Senator Max Baucus, a Democrat from Montana and chairman of the Senate Finance Committee, said his plan would provide a “permanent solution” to U.S. international tax rules that encourage companies to leave profits outside the country.

Business groups lined up to criticize Senate Finance Chairman Max Baucus’s international tax proposal within hours of its release, slowing the momentum he sought to build for the plan.

Baucus released a draft bill yesterday that would lower the corporate tax rate by an unspecified amount, end a rule that has encouraged companies to accumulate about $2 trillion in earnings in their foreign subsidiaries and impose a 20 percent tax on those stockpiled profits.

The Finance panel chairman, who has been criticized by fellow Democrats for being too friendly to business, is encountering opposition from some of the multinational corporations he has courted. Coalitions backed by companies including General Electric Co. (GE), Cisco Systems Inc. (CSCO) and Caterpillar Inc. (CAT) said the plan would hurt U.S. companies’ ability to compete in overseas markets.

“They increase complexity and move our antiquated tax system even further from international norms,” Bruce Josten, the top lobbyist at the U.S. Chamber of Commerce, said of Baucus’s ideas in a statement.

The chamber, the country’s largest business lobbying group, was joined yesterday by the Business Roundtable, the National Association of Manufacturers, the Alliance for Competitive Taxation, the Let’s Invest for Tomorrow America Coalition and the National Foreign Trade Council, which each issued statements criticizing the tax proposal.

The trade council, whose board of directors includes Microsoft Corp. (MSFT) and United Technologies Corp. (UTX), said it was “disappointed” in Baucus’s plan.

‘Penalize Multinationals’

“This draft appears to penalize multinationals and will make it more difficult for companies to compete globally,” Catherine Schultz, the group’s vice president for tax policy, said in a statement.

Baucus, of Montana, who plans to release drafts on other tax topics today and tomorrow, wants to make the biggest tax code changes since 1986 before he leaves Congress at the end of 2014. He and his House Republican counterpart, Dave Camp of Michigan, have been stymied by the partisan divide over whether the government should collect more revenue.

“I’m just trying to make something happen by taking the initiative,” Baucus said yesterday. “Tax reform has more political potency than a lot of people at first believe.”

Technically Complex

The international tax system is one of the most technically complex areas of the U.S. tax code and potential changes are being watched closely by companies that have significant global businesses, including Pfizer Inc., Apple Inc. and The Procter & Gamble Co. (PG)

For more than two years, many companies have been lobbying Congress for a system that would lessen the tax burden on U.S. companies’ overseas income. They make the argument that most other industrialized countries don’t require their companies to pay home-country taxes on foreign income.

Baucus’s plan would make it harder for companies to shift profits from the U.S. and require a type of minimum tax that would limit the benefit of earning income in low-tax countries.

Some of the criticism stems from the plan’s vagueness on the corporate tax rate. Unlike Camp’s proposal, which favors a 25 percent rate without specifying how he would offset the budgetary cost, Baucus has said only that he hopes to get the rate below 30 percent, down from 35 percent now. Corporations would find the changes more palatable with a lower rate.

Groups aligned with labor unions, such as Americans for Tax Fairness and Citizens for Tax Justice, said yesterday that Baucus’s plan doesn’t go far enough because he’s insisting that corporate tax changes should be revenue-neutral instead of raising the taxes companies pay.

Lew’s Support

Baucus garnered supportive or neutral statements from Treasury Secretary Jacob J. Lew and at least four members of his committee -- Democrats Ron Wyden of Oregon, Sherrod Brown of Ohio and Jay Rockefeller of West Virginia, along with Republican Rob Portman of Ohio.

Baucus’s plan would make it tougher for companies to claim that profits are earned in low-tax countries, said Ed Kleinbard, a tax-law professor at the University of Southern California.

Under the Baucus plan, technology and pharmaceutical companies would no longer be able to pay single-digit effective tax rates on their foreign income, he said.

‘Income Strategies’

“The package reduces the opportunities for large-scale stateless income strategies both by U.S. multinationals and by foreign multinationals doing business in the United States,” said Kleinbard, a former chief of staff of the congressional Joint Committee on Taxation.

Under current law, U.S. companies owe taxes at the federal rate of 35 percent on all income they earn around the world. They receive tax credits for payments to foreign governments and can defer U.S. taxation until they repatriate the money.

That system has encouraged companies to accumulate untaxed earnings in foreign subsidiaries. It also creates incentives for companies to move intellectual property out of the U.S. and into low-tax jurisdictions.

Many other countries, including the U.K. and Japan, have shifted to what’s known as a territorial system in which companies owe little or no taxes on their foreign income. In the opposite direction, industrialized countries have been moving to prevent companies from using accounting maneuvers to shift income outside their borders.

The Baucus plan is “a cautious, modest step in the direction of territorial taxation,” said Alan Viard, a resident scholar at the American Enterprise Institute, a research group in Washington that advocates for small government.

Hybrid System

Baucus, in suggesting a hybrid between current law and a territorial system, is proposing two options for his minimum tax. The first would tax all income from foreign sales and services immediately at a rate equal to 80 percent of the new U.S. rate.

Baucus has said he wants a new tax rate of less than 30 percent. If it were set at 28 percent, for example, the minimum tax would be set at 22.4 percent.

That rate would apply to a company’s earnings in each jurisdiction, so that companies operating in high-tax areas would owe no incremental U.S. tax on their foreign earnings. A company operating in Ireland, by contrast, would effectively have to pay the U.S. the difference between the Irish tax rate of 12.5 percent and 22.4 percent.

The second option would set a lower minimum tax rate, 60 percent of the U.S. rate, while narrowing the definition of income eligible to only income from active business operations. Other income would be taxed at the full U.S. rate immediately.

Accumulated Earnings

The earnings that companies have accumulated under the current system would be taxed at 20 percent over eight years, regardless of whether companies have the money in liquid form and regardless of whether they bring it back to the U.S.

That tax would generate more than $200 billion, and Baucus hasn’t decided what to do with the revenue. Some could be used to ease the transition to the new system. Some could be used, as President Barack Obama has suggested, for infrastructure.

Baucus is seeking comments from companies and senators by Jan. 17.

Senator Orrin Hatch of Utah, the top Republican on the Finance Committee, said he disagreed with Baucus’s decision to release the drafts while Democrats are proposing tax increases in a budget conference committee.

Today’s draft is expected to address tax administration issues, including tax filing and identity theft. Tomorrow’s proposal is expected to focus on capital-cost recovery and depreciation rules.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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