Common Elements in Obama, Camp International Tax Proposals


Like a parakeet and an ostrich, a pair of tax proposals from Democrats and Republicans released over the past few weeks are fundamentally different from afar--but if you start to examine them closely, you'll notice significant similarities.

On Feb. 26, Rep. Dave Camp, the Republican chairman of the House Ways and Means Committee, released a long-gestating draft tax overhaul proposal, which encompassed both the personal and corporate, as well as national and international tax systems. (http://tax.house.gov/)

About a week later, on March 4, President Obama released his annual budget request to Congress. It included several new and previous budget items on taxes. (http://www.treasury.gov/press-center/press-releases/Pages/2304.aspx)

Perhaps the most prominent example of common ground are their proposals to tax the profits of high-value intangible assets being held in low-tax jurisdictions. These types of profits--such as the billions that Apple, Microsoft, and other tech companies have accumulated outside of the IRS's reach through hugely profitable patents--have become the focus of news coverage in the U.S. and abroad. A recent analysis by Bloomberg News found that the largest U.S. corporations have accumulated $1.95 trillion outside the country--a 11.8 percent increase from the previous year. (http://www.bloomberg.com/news/2014-03-12/cash-abroad-rises-206-billion-as-apple-to-ibm-avoid-tax.html)

Both Obama and Camp would use an existing framework, Subpart F, to tax U.S. companies keeping valuable intangibles--especially, though not limited to, intellectual property such as patents, copyrights, and trademarks--in countries with low corporate tax rates. In current law, Subpart F designates certain types of income, such as dividends and royalties, as taxable immediately in the U.S. This means U.S.corporations don't have the option to defer bringing those profits home, as they do in general for money made overseas.

Obama and Camp both would broaden Subpart F to include a new category that, through slightly different formulas, would capture profits earned from intangibles over a certain threshold. Both plans would tax these profits at somewhere between 10 percent and 15 percent instead of at the full U.S. corporate tax rate. And, under both proposals, this provision would kick in only when the tax rate is low--10 percent for Obama, 15 percent for Camp.

The biggest difference between the two proposals is that Obama's would cover  only intangibles transfered from the U.S., whereas Camp's proposal would cover any intangible property, no matter where it originated, so long as it was ultimately controlled by a U.S. corporation.

Of course, the larger framework is much different. Obama's proposal is a stand-alone item to raise $26 billion in revenue over the next 10 years, while Camp's plan would use the savings from his proposal to help lower the corporate income tax rate. But if some sort of compromise were to arise in the future, it's likely this idea would be part of it.

That Republicans are joining Democrats in efforts to curb tax evasion shows how prominent the issue has become.

"It may have started out a little bit more as a partisan issue, but I think everyone has recognized the problem now," said Ray Beeman, tax counsel for the House Ways and Means Committee, at a Federal Bar Association panel on Feb. 28. "People were a little taken aback when we put our draft out in 2011, that Republicans were doing base erosion. We said, 'Look, it's a problem, we need to solve it.'"

But why is there such a consensus on this particular strategy?

Mainly, because it's simple. The world is currently embroiled in a discussion on revisions to the international tax system, with many calling for fundamental changes in light of the way companies are allowed to shift assets through jurisdictions in the digital economy. Putting a backstop in place for one growing area of tax avoidance is much easier to envision than a wholesale revision.

"You can either really focus in on getting those pricing rules right, which we all know is very hard, or you can have more prophylactic rules that say, 'If you mess around with pricing, we're going to get you one way or another, because we're just going to automatically tax the income that you played around with,'" said Robert Stack, Deputy Treasury Secretary for International Tax Policy, at a KPMG webcast in August of 2013.​

  Alex Parker, Staff Writer, Transfer Pricing Report