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Limiting excess foreign returns and denying deductions for offshore earnings are among the options for guarding against base erosion if the U.S. shifts to a territorial system, a Republican Senate staffer said.
Tony Coughlan, tax counsel for the Senate Finance Committee, said he has seen several base erosion-related proposals as part of the mix for tax reform, as the GOP border-adjusted tax plan appears to have fallen out of favor.
“There’s a lot of talk about base erosion, people get into it pretty quickly once they start talking about territorial,” Coughlan said. He spoke during a June 7 panel discussion at a tax conference sponsored by Bloomberg BNA and Baker McKenzie.
U.S. corporations have long advocated shifting to a territorial system, which would exempt most or all foreign income from U.S taxation. But critics claim it could risk losing the U.S. tax base without measures to prevent income shifting—a much stickier subject, which often pits different industries against each other.
Coughlan said the proposals he has seen include stronger Subpart F rules, limits on excess returns in foreign jurisdictions, and “round-trip” rules that would tax income from intangible assets used for sales or services in the U.S. He said he has also heard suggestions that a territorial system, which exempts foreign income from U.S. taxation, should also disallow deductions for U.S. entities that contribute to that income.
Many of the ideas suggested by Coughlan are similar to those in a 2014 draft from then-Ways and Means Committee Chairman Dave Camp (R-Mich.), including Option C, which taxed intangible income over a certain return and included “round-trip” rules that resulted in a minimum level of taxation in any jurisdiction.
The Camp proposal fell out of favor as Republicans pushed a border-adjusted cash flow tax as part of their reform blueprint, which was released in June 2016. But now that the blueprint has stalled—following heavy opposition from the retail sector—some of Camp’s ideas are returning to the discussion, Coughlan’s statement suggests.
Coughlan said denying deductions related to foreign income could act as a measure against base erosion by reducing the incentive for companies to earn money offshore.
“To the extent somebody thought, ‘Oh, we’ll just ship all of our money offshore to take advantage of this new territorial regime, they’d have to realize that what went along with that is they’d lose some of those deductions,’” Coughlan said.
He also said some advocated focusing on a cut in the corporate rate, which is currently 35 percent.
“If we got it down from 35 to 15, you’re done,” he said. “Don’t worry about base erosion. Nobody’s going to be eroding out of the base, at least not nearly enough. So that’s one stream of thought.”
Coughlan said early 2018—before the midterm campaign season heats up—marks the latest that tax reform could be finalized during this congressional session.
“The main talk is we need to do tax reform sooner—it gets more difficult the more we roll into 2018,” he said.
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