Friday, June 3, 2011

Territoriality in Play

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After lying low for some time, interest in a U.S. territorial tax system is reviving. On November 10, Erskine Bowles and Alan Simpson, the co-chairmen of the President’s deficit reduction commission, released their draft proposal for cutting the deficit and remaking the income tax. Their plan assumes that tackling the deficit will require both spending cuts and a rewrite of the tax code, and it offers three different paths to tax reform. Option 2, designated “Wyden-Gregg Style Reform,” is the most detailed and most closely resembles traditional tax reform. It also seems to be the plan that would most likely gain approval by the committee as a whole, which requires the vote of 14 of 18 members.

The chairmen’s outline of Option 2, under the topic “Corporate tax reform,” includes a bullet point advocating “International tax reform including a territorial system.” No further explanation is provided, including the revenue effects. Presumably, their recommendation for a territorial system is rooted in the concern that too many U.S. multinationals are reluctant to repatriate (and thereby subject to U.S. tax) their overseas earnings, stunting their ability to reinvest earnings in their U.S. operations.

Some insight into the Obama Administration’s position can be gleaned from comments made in Chicago on November 12 by Stephen Shay, Deputy Assistant Treasury Secretary for International Tax Affairs. As reported by BNA’s Daily Tax Report, Shays expressed some skepticism about the correlation between a territorial tax system and repatriation of overseas earnings. He noted that Japan’s recent conversion to a territorial system has not shown the expected level of repatriation and the hoped-for increase in domestic dividend payments.

It is noteworthy that Shay did not reject territoriality out of hand. Although the Administration has not been friendly to the use of Subpart F deferral, it may find itself having to be more flexible on this issue as proposals for tax and budgetary reform gain additional momentum.

Harold W. Pskowski, Managing Editor, U.S. International

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