From Daily Tax Report®
May 18, 2016
May 17 — Despite questions about who would bear federal revenue burdens under a plan to end double taxes on corporate income, Senate Finance Committee Chairman Orrin Hatch (R-Utah) is pressing forward.
Hatch wants to release details in the next several weeks on a proposal to set a single layer of tax at the shareholder level, he said at a May 17 hearing on the idea.
The plan, called corporate integration, makes eminent sense at this moment, Hatch said.
“It’s a step in the right direction,” he told Bloomberg BNA May 17. “It could lead to stopping some of this erosion of our corporate world because you’re giving the corporations the right to bring down their own rates by how much they pay out in dividends to their shareholders.”
Hatch envisions corporate integration as a way station to more broadly overhauling the U.S. tax code. And in addition to putting corporate stock on more equal footing with debt, it could stanch some of the cross-border tax issues that have led some U.S. multinationals to relocate their headquarters, intellectual property and workers abroad for tax purposes, Hatch said.
Those factors prompted new anti-inversion legislation—the Protecting the U.S. Corporate Tax Base Act (H.R. 5261)—introduced by House Ways and Means Committee ranking member Sander Levin (D-Mich.).
Hatch hasn't been a fan of Democratic approaches on international taxes, though, and has instead promoted corporate integration as a solution. He has scheduled another corporate integration hearing on May 24.
But tax-exempt groups, retirement savers and foreign shareholders have concerns about the dividends-deduction component of Hatch’s plan.
Those non-taxed entities currently own about three-quarters of U.S. corporate stock. Fifty years ago, 84 percent of corporate stock was held in taxable accounts, according to research presented during the hearing by Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.
That shift partly explains the decline in corporate tax receipts over the past five decades, he said, adding that it also has corporate integration implications because such a large swath of entities largely avoid taxes under current law.
Part of the attraction of the Hatch plan lies in the relative immobility of shareholders compared to companies, according to Rosenthal and Michael Graetz, a tax law professor at Columbia Law School who worked on administration plans for corporate integration in the early 1990s and early 2000s.
Rosenthal and Graetz supported shareholder-level taxes during the hearing, as did Bret Wells, a law professor at the University of Houston Law Center, although each did offer suggestions.
The withholding on dividends would probably be nonrefundable, Rosenthal said. Shareholder-level taxes would ensure progressivity, Wells said.
Limiting the deduction for interest ought to be considered, Graetz said, adding that corporate integration through a shareholder credit or a dividend deduction with withholding wouldn’t solve all woes.
He advocated for a lower statutory corporate tax rate of 15 percent and urged territorial taxation of foreign income. “Integration is not penicillin,” Graetz said.
But corporate integration could backfire by diminishing small businesses’ incentives to offer retirement plans for workers, said Judy Miller, director of retirement policy for the American Retirement Association.
That would hurt those who earn between $30,000 and $50,000 annually because they are 15 times more likely to save through job-sponsored retirement plans than to set up their own individual retirement accounts, she said. Corporate integration without encouraging small business owners to establish and maintain qualified retirement plans could prove “horrible,” she said.
The Finance Committee’s ranking member, Ron Wyden (D-Ore.), echoed those concerns. He also suggested that corporate integration might not benefit newer companies that need to rely more on cash flow to run their day-to-day operations than established companies that can more readily issue dividends.
“To get tax reform passed, it has to be bipartisan,” Wyden said during the hearing. “To me, that means getting everybody in America a chance to get ahead, not just the fortunate few.”
Levin’s bill is aimed at tax planning to skirt U.S. taxes.
One provision would stop foreign parent or affiliate companies from borrowing deferred earnings from controlled foreign corporations, called hop-scotching. The other provision would stop companies’ next step when they can’t hopscotch, called de-controlling, by lowering controlled foreign corporations’ U.S. ownership levels to a point that they aren’t subject to U.S. taxes.
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Text of H.R. 5261 is in TaxCore.