Baucus proposed international tax reform but future action remains uncertain
In an effort to jumpstart international tax reform, Senate Finance Committee Chairman Max Baucus is suggesting major changes in the way U.S.-based multinational corporations are taxed on their overseas income. Though the plan is advancing tax reform discussions, it leaves many controversial issues unresolved, Gleckman explains.
In an effort to jumpstart moribund tax reform efforts, Senate Finance Committee Chairman Max Baucus (D-MT) is suggesting major changes in the way U.S.-based multinational corporations are taxed on their overseas income.Skip to next paragraph
Howard Gleckman is a resident fellow at The Urban-Brookings Tax Policy Center, the author of Caring for Our Parents, and former senior correspondent in the Washington bureau of Business Week. (http://taxvox.taxpolicycenter.org)
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The plan is quite specific (even including legislative language and a 90-page technical summary) but it is not a formal proposal and leaves many controversial issues unresolved. Normally, the chair of a tax-writing committee would release a “chairman’s mark” for the panel to consider. Baucus calls today’s document a “staff discussion draft” and is asking for public comments by mid-January.
According to the plan, passive income from overseas activities would continue to be taxed at U.S. rates. Most income from the sale of goods and services overseas would also be taxed at full U.S. rates. The draft would end the practice of deferral that allows firms to avoid U.S. tax on foreign earnings until they bring those profits home. However, income that is currently parked overseas would be taxed at a 20 percent rate payable over 8 years.
Baucus would move the U.S. closer to a territorial system favored by many multinationals and GOP lawmakers. Under such a system, income is taxed in the jurisdiction where it is earned rather than by the firm’s home country. While the plan does not fix a specific tax rate, staffers say Baucus is aiming to reduce the corporate rate from 35 percent to about 30 percent.
But in the Baucus plan, this shift closer to a territorial tax comes at a price. To limit the ability of multinationals to game the system, the plan would impose a stiff minimum tax on income earned overseas by foreign affiliates of U.S. parent companies. Firms would be eligible for U.S. tax credits to offset taxes they pay to other countries, as they are today.
The minimum tax has generated widespread interest among independent tax experts and multinationals. My former Tax Policy Center colleague Rosanne Altshuler, now at Rutgers University, has co-authored one idea. President Obama and House Ways & Means Committee Chairman Dave Camp (R-MI) have proposed others. However, Baucus did not settle on a single plan. Rather he suggests two alternative versions.