Tuesday, November 19, 2013

Senate Finance Committee international business tax reform discussion draft: Part 3

So what is the long-term significance of the Senate Finance Committee discussion draft on international tax reform?  Interesting and ambitious tax reform plans, international and otherwise, get promulgated every couple of years, and nothing much ever seems to happen.  Here, as usual, we can expect the Washington partisan divide, interest group politics, etcetera, to stand in the way.  Senator Baucus and House Ways and Means Chairman Camp, who appear much readier than most of their colleagues to consider engaging in a 1986-style bipartisan process, will both be leaving their posts, and that might well be that.

But even proposals that get put on the shelf can matter, if someone in the future is possibly going to reach onto the shelf and pick out whatever is on top.  As per my prior two posts, I see three big takeaways from the Senate Finance discussion draft.

The first is its proposing to address rampant tax avoidance by U.S. companies.  Now, this is a trend that already has been gathering political momentum over the last few years, from all of the Apple, Google, etc., stories in the newspapers.  Whether it gets anywhere depends partly on U.S. politics - the companies have plenty of friends in Washington, both Republicans who hate all taxes, and Democrats who are friends with particular industry groups.  And whether it gets anywhere also depends on developments outside the U.S., such as the "base erosion / profit shifting" (BEPS) initiative that is being pursued by countries multilaterally.  Much easier for the U.S. to act effectively if not going to alone.  In this broader story, the discussion draft is admittedly just one more grain of sand on top of the dune.

But second, the discussion draft adds credence to the idea of levying a "transition tax" on U.S. companies' unrepatriated foreign earnings, as part and parcel of ending the repatriation tax along with deferral.  This is not only a good idea, if done properly, but one that politicians could potentially love (if they think of it as a one-time pot of "free money").

And third, the 60% / Option Z plan, discussed in my previous post, points the way to taxing resident companies' foreign source income at a rate that is between zero and the full domestic rate, while also rendering foreign taxes less than fully reimbursable, without violating tax treaties via formally defined "double taxation."  Given the arguments for such an approach that I develop in my book, this could end up being a major contribution.

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