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June 7 — Corporate integration doesn’t seem to offer the right policy prescription to address cross-border tax problems, a Treasury Department official said.
President Barack Obama’s administration has proposed shifting to more of a territorial tax system on foreign income, with a minimum tax. Meanwhile, Senate Finance Committee Chairman Orrin Hatch (R-Utah) is developing a dividend-deduction plan with a withholding tax to get rid of a double layer of tax on corporate income.
Treasury’s Harry Grubert expressed skepticism with Hatch’s corporate integration proposal, full details of which have yet to be released.
Half of U.S. multinational corporations don’t pay enough U.S. corporate tax to finance a full credit for the dividends they currently pay, which is problematic because the dividend deduction only confers a benefit if a corporate-level tax was paid, said Grubert, a senior research economist in Treasury’s Office of Tax Analysis.
“That half can continue shifting,” he said at an event hosted by the American Enterprise Institute on June 7.
Other concerns relate to capital gains, which aren’t taxed for tax-exempt groups, pension funds and foreign investors, Grubert said. Hatch hasn’t shared enough details of his plan to know, but Grubert wondered whether it would include a 39.6 percent tax on capital gains.
“Integration is really a weak vehicle for trying to control the inversions and income shifting because dividends are something that the company or the shareholders can decide to reduce or increase,” Grubert said. “So it’s a very elastic kind of policy vehicle, policy instrument.”
“We still haven’t gotten a report back from Joint Tax,” Hatch said of the congressional Joint Committee on Taxation, from which he has requested a revenue estimated. “But we have good indication that they are excited about it.”
Christopher Hanna, a senior tax policy adviser to Hatch, said corporate integration that includes a dividends-paid deduction could be seen as a rate cut.
“That could be a carrot for U.S. corporations basically to stay here as opposed to maybe consider inverting,” Hanna said at the AEI event.
A withholding tax on any interest payments could address earnings stripping accomplished through such payments, he said. A dividend deduction could also be a solution to the problem of trapped cash overseas, he said.
A U.S. multinational could repatriate foreign earnings in the form of a dividend that would be gross income for the U.S. parent corporation, Hanna said. Those earnings could then be paid out as dividends to shareholders, and then the company could get an offset in deductions.
“Therefore those foreign earnings could be repatriated there at little or no U.S. tax cost to the corporation,” Hanna said.
Difficulties with a dividends-paid deduction proposal include dealing with revenue neutrality, possible treaty override issues with foreign shareholders and bondholders, and issues with tax-exempt shareholders and bondholders, Hanna said.
Another option to deal with cross-border income would be a destination-based cash flow tax, said Alan Auerbach, a professor at the University of California, Berkeley.
The proposal relies on the fact that consumption is easier to identify than production, he said at the American Enterprise Institute event. It would eliminate the tax consequences of income shifting and turn the U.S. into a tax haven, Auerbach said.
Income shifting would become other countries' problems, he said. “It's the only practical idea.”
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