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Nov. 17 — Momentum to create a territorial tax system is expected to gain steam in 2017—but a top academic said lawmakers don’t need to do that to entice U.S. multinationals to bring home the income they earn abroad.
Congress could find a middle ground that doesn’t absolve companies of paying tax on the income they earn overseas under a territorial approach, yet creates an incentive for repatriation, according to Reuven Avi-Yonah, a prominent tax law professor at the University of Michigan and author of several papers on global tax issues.
A short-term solution, he said in a Nov. 17 paper, would be to abolish deferral—an action that would tax U.S. multinationals currently on all of their income—and lower the corporate income tax rate.
In the longer term, he said, Congress should consider a destination-based tax system—a concept that’s already under discussion as part of a House blueprint for tax overhaul.
Avi-Yonah, the Irwin I. Cohn law professor at the Michigan college, said axing deferral and cutting the corporate rate would solve the problem of “trapped income” without encouraging companies to shift their earnings out of the U.S. tax base.
Moving forward, he said, compromise could be reached, given the overlap between President Barack Obama’s call for a minimum tax on foreign earnings and the tax overhaul plan proposed by former House Ways and Means Committee Chairman Dave Camp.
Congress should tread carefully in developing a destination-based tax system, Avi-Yonah and others said at a Nov. 17 tax policy event sponsored by the the Century Foundation and the Economic Policy Institute.
Eric Toder, an institute fellow and co-director of the Tax Policy Center, said a destination-based cashflow tax does solve some problems associated with offshore profit shifting and inversions, but the plan is really benefiting high-income investors.
He said that system would exempt exports and let companies allow deductions for all costs, and many of those companies would be reporting permanent losses.
“If we don’t deal with those losses and refund those losses, the system doesn’t work,” Toder said. “And I would just like to see how people react when you have the government sending checks to all of these corporations. I think people haven’t realized how that’s going to play out.”
At the same event, Avi-Yonah said the direction of the destination-based tax proposed by House Speaker Paul D. Ryan (R-Wis.) begins to look more like a value-added tax, despite Ryan’s assertion that it’s a corporate income tax.
“The basic problem with the value-added tax is that it’s a regressive tax,” he said. “It’s a consumption tax and the richer you are the less percentage of your income you consume.”
The tax professor said he might be on board with a VAT instead of a corporate tax if there were a way to tax shareholders, since a corporate tax tends to fall on individuals. Those might include owners of passthroughs taxed at the individual rate, or publicly traded entities that could, in principle, be taxed on the appreciated value of their shares.
That’s “the right way of doing it. So then we don’t have Bill Gates sitting on $40 billion of unrealized appreciation of his Microsoft stock,” Avi-Yonah said. He acknowledged, however, that “this is all politically, completely unrealistic, which is why Paul Ryan goes to great lengths to disguise what he’s doing and pretend that what he’s doing in this plan is not a VAT, but rather a normal corporate income tax, which it is not.”
Tax attorneys said a plan to abolish deferral and lower the corporate income rate isn’t likely to happen, and it’s too soon to say how the destination-based tax issue will play out in Congress.
Paul Schmidt, chair of tax at Baker & Hostetler LLP in Washington, said in an e-mail that “one aspect of it that lawmakers might find attractive is the border adjustability. I do think that tax reform discussion will include consideration of whether there is a way to introduce (hopefully trade compliant) border adjustability into the system.”
John Harrington, a tax partner at Dentons US LLP, said it seems unnecessary for Congress to act on deferral when a destination-based tax is already under discussion. He said ditching deferral and lowering the rate would raise a host of troublesome issues.
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