For companies with a lot of foreign income from intangible products like patents, Dave Camp has a carrot-and-stick approach to overhauling the tax code.
Camp, the top Republican tax writer in the U.S. House of Representatives, says putting a rate of 15 percent on all foreign income from intellectual property rights and intangibles would limit revenue erosion when Congress pursues broad tax reform, Bloomberg BNA reported.
The incentive would be a deduction for income related to intangibles kept in the U.S.; the disincentive is an immediate inclusion for income related to such intangibles held abroad. Companies would have less pressure to shift income to low-tax locales because that income would be taxed at the same rate, whether it is earned in the U.S. or Bermuda, Camp said.
“Moving intangibles to tax havens would have little or no appeal, since the income earned from those intangibles obviously would be taxed at the same rate, regardless of location,” said Camp, who is from Michigan and heads the House Ways and Means Committee.
These intangibles are part of the fight over offshore cash and taxes. U.S. companies are shifting more of their revenues overseas. The nation’s 83 biggest companies increased their untaxed offshore holdings by 14.4 percent to $1.46 trillion in the past year, according to data compiled by Bloomberg.
Camp is working on the first major overhaul of the tax code since 1986 and says he wants Congress to have something done by year-end. A discussion draft Camp released in late 2011 included this idea, referred to as “Option C,” as one of three choices to try to avoid erosion of the tax base.
Companies could get below a 15 percent effective rate by subtracting any credits for foreign taxes paid on the same income under Option C, Camp said at a hearing last week on tax havens, base erosion and profit-shifting. Camp didn’t discuss the other two options at the hearing.
He said work on the matter with the Joint Committee on Taxation has led him to believe this plan is an effective safeguard, and said it has also received the most business community support among the discussion draft options.
The committee’s ranking member, Michigan Democrat Sander Levin, noted the recent Senate Permanent Subcommittee on Investigations hearing on Apple Inc., which has an Irish entity that has received tens of billions of dollars of income with no tax residence, and also complained that other major U.S. corporations use legal tax avoidance techniques to shift income overseas, including Microsoft Corp. and Google Inc.
“The challenge of ending massive tax avoidance must be at the forefront of any tax reform effort worth its salt,” Levin said.
Option C won support from one of the hearing’s witnesses, Paul Oosterhuis, a partner at Skadden, Arps, Slate, Meagher & Flom LLP. He said it would help neutralize where businesses locate their factories and similar activities. Differentiation of products sold into foreign markets from products sold into the U.S. market represents the top advantage, he said.
Transition rules may be needed for products sold back to the U.S., similar to what Option C proposes for profits on intellectual property, he said.
For foreign products, most of which he said come from consumer businesses, Oosterhuis said the country where the products are consumed has a large right to tax that income.
For example, he pointed to recent complaints in the U.K. over inbound companies such as Starbucks Corp. and their income in the country. Option C recognizes that U.S. authorities have much less of a right to assert jurisdiction to collect revenue out of that income.
“And I think that’s a very sensible distinction over the long run,” Oosterhuis said.
University of Southern California law school professor Edward Kleinbard, another witness at the hearing, expressed concerns about administering such a plan. He instead advocated a genuine worldwide tax consolidation with a 25 percent corporate tax rate.
Kleinbard, who served as the Joint Committee on Taxation’s chief of staff from 2007 to 2009, said multinational firms are able to operate within current rules to produce stateless income by engaging in large-scale base erosion and profit shifting. He said his option would offer more simplicity and prove more difficult for tax gaming.
“This idea is less wacky than you might think,” Kleinbard said. “The economic effects of worldwide consolidation are basically the same as a territorial tax with a 25 percent worldwide minimum tax as an anti-abuse measure.”
By contrast, he said current law or unprotected territoriality heavily subsidizes foreign investment at the expense of the U.S. economy. Kleinbard conceded that whatever international taxation choices legislators make in overhauling the code, a new system will lead to higher statutory taxes paid by multinational companies, either to the U.S. or abroad.
A growing number of executives at such firms back higher statutory rates to free up “trapped” cash, the liquid reserves they cannot easily mobilize at present because of the current tax system, Oosterhuis said. He added that a corporate tax rate lower than 25 percent would be preferable.