For over 50 years, Bloomberg Tax’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...
A minimum tax on foreign earnings, proposed in the Republican tax framework, might mean multinational companies would pay more taxes than they face today, tax lawyers and lobbyists say. But there isn’t enough information yet for them to judge.
“If a minimum tax is at a rate that’s not sufficiently low, there’s real concern about whether you’ve really been given the benefit of a territorial system and whether you’ve really cured the inversion problem,” Paul M. Schmidt, tax chair of Baker & Hostetler LLP, told Bloomberg Tax.
The nine-page framework released Sept. 27 would set up a territorial system, exempting dividends from foreign subsidiaries, but also would “protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations.” The framework doesn’t specify what the minimum tax rate would be or how such a tax would work.
Peter A. Furci, a partner and co-chair of Debevoise & Plimpton LLP’s global tax practice, said he interpreted the proposal to mean the minimum tax would be a current tax, applied whether or not the foreign earnings are actually distributed out. “If that’s the case, in some respects, the new regime may be less favorable than the current regime, which does effectively permit you indefinite deferral,” he said.
House Ways and Means Committee Republicans agree that a foreign minimum tax on overseas corporate earnings will likely be a necessary part of moving to a territorial tax system, Rep. Pat Tiberi (R-Ohio) said.
Ways and Means Chairman Kevin Brady (R-Texas), however, has cautioned that the committee hasn’t landed on a specific plan and that members continue to work with Treasury Department officials on the issue.
The minimum tax proposal recognizes that while moving to a territorial system and a lower corporate rate may help prevent inversions, companies will still have an incentive to move assets—especially intangible assets—outside the U.S. as long as other countries have lower rates, said Schmidt, former legislative counsel to the Joint Committee on Taxation.
“There has got to be an anti-base erosion solution,” Rep. Peter Roskam (R-Ill.), the Tax Policy Subcommittee chairman, told reporters. “As you move to a territorial system, we want to make sure you don’t exacerbate a problem of companies moving their IP offshore.”
Schmidt said the concern for multinationals arises from the lack of detail on how the tax proposed in the framework would work.
Past proposals, including plans from former Ways and Means Committee Chairman Dave Camp (R-Mich.) and President Barack Obama, included a minimum tax on foreign earnings, he said. Most of those proposals were based on a country-by-country approach, Schmidt said.
For example, if a U.S. multinational earned income in a country that doesn’t meet a specific minimum rate, the company would have to pay a certain amount of tax to reach the minimum threshold, Schmidt said. Another option under a country-by-country approach would be to treat low-taxed income as Subpart F income, meaning it’s treated as currently taxed income, he said.
However, “we’re also hearing some discussion that this may be on an aggregate approach—looking at the effective rate of all of your foreign income,” he said.
Where Congress will land on the minimum tax remains fluid, as the Senate Finance and House Ways and Means committees continue to debate the tax and get input from a variety of sources, said a tax lobbyist who requested anonymity to protect clients’ interests.
Multinationals largely oppose the idea, but are somewhat resigned that it will happen, the lobbyist said.
Corporations are now pushing to find an acceptable compromise, such as a targeted expansion of Subpart F or a reduced dividends-received deduction. The Subpart F provisions of the tax code eliminate deferral of U.S. tax on certain categories of foreign income by taxing U.S. persons on their pro rata share of the income earned by controlled foreign corporations.
Obama’s proposal included a 19 percent minimum tax on foreign income and a one-time 14 percent transition tax on previously untaxed foreign income—a non-starter for the business community, the lobbyist said.
Another central focus among companies is how to transition to a new system, Liam Donovan, a lobbyist at Bracewell LLP, told Bloomberg Tax.
“If that’s what we are going to do, how are we going to get from A to C? What’s the in-between step?” Donovan asked. “Those decisions need to be made based on current law,” he said. “How do we grandfather things to not create disruption and uncertainty?”
Schmidt said multinationals and lobbyists are aware they may not have much time to comment on proposed changes. “I think people are really gearing up to try to comment and get their voices heard as much as they can now—even in advance of seeing things—because there’s a real recognition that things could go from draft to legislation very quickly.”
To contact the editor responsible for this story: Meg Shreve at email@example.com
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)