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House of Representatives Committee Examines International Corporate Tax Reform


6/14/13

Synopsis:

Multinational corporations, international tax rules, base erosion and profit shifting were the subject of a June 13, 2013 hearing held by the House Ways and Means Committee (“Committee”). The hearing examined the current state of multinational corporate taxation, tax base erosion, and proposals to reform international business taxation.

International Tax Reform Perspectives – The Opening Statements

In his opening statement, Committee Chair Dave Camp (R-Michigan) discussed feedback from taxpayers, tax practitioners and scholars on the international tax reform discussion draft, released in October 2011. Chairman Camp highlighted a “universal observation” that the United States has high corporate tax rates and an “outdated” international taxation system that prevents U.S. companies from competing effectively with non-U.S. based international corporations. While advocating a lower rate, Chairman Camp also noted that rate reduction alone would not be sufficient. He spoke about the need for reform legislation that protects against domestic corporate tax base erosion through profit shifting by domestic companies to low-tax jurisdiction.
 
Ranking Member Sander Levin (D-Michigan) noted in his statement that reform is necessary to curb the ability of companies to engage in profit shifting to avoid domestic taxation – a currently legal practice. Highlighting the global nature of the modern economy, Rep. Levin stated that international tax reform should focus beyond lower rates and concentrate on accurately capturing the U.S.’s corporate tax base.
 
Testimony and Members’ Questions

The Committee received testimony from three experts in the field of international taxation:

  • Pascal Saint-Amans, Director of Tax Policy and Administration for the Organisation for Economic Co-Operation and Development (OECD)
  • Edward Kleinbard, former Chief of Staff of the Joint Committee on Taxation and a professor at the University of Southern California School of Law
  • Paul Oosterhuis, a partner with the law firm Skadden, Arps, Slate, Meagher & Flom
     

Double Non-taxation?
 
Saint-Amans appeared on behalf of the OECD to discuss the organization’s action plan for base erosion and profit shifting (“BEPS”). The OECD’s effort is designed to move to a method of addressing “double non-taxation” instead of removing double taxation. The BEPS action plan, according to Saint-Amans, focuses on coordinated tax reform that will harmonize international rules that do not disadvantage the health of member nations’ resident multinational corporations. Saint-Amans stated that the aim of the action plan is to provide certainty to governments and multinational corporations regarding international taxation and to level the playing field between domestic and foreign multinationals. The BEPS action plan is targeted for release in July of 2013. Saint-Amans declined comment on most of the specific U.S. tax reform proposals, but spoke broadly about international tax reform and practices in other nations.
 
What about “Stateless Income?”
 
Kleinbard stated that many multinational corporations generate “stateless income.” To combat the distortions that result from profit shifting and its impact on business and investment income taxation, Kleinbard advocated for stronger anti-abuse measures and a consolidated tax system that applies one rate to U.S.-source and foreign-source income. Kleinbard suggested a 25 percent rate for this consolidated system.
 
U.S. Multinationals’ Ability to Compete Worldwide
 
Oosterhuis emphasized the need to avoid damaging the competitiveness of domestic multinational corporations when crafting international tax reform. Multinational corporations have a responsibility to their shareholders to minimize their tax burdens, which represent a large expense. Oosterhuis stated that lower tax rates in other nations are attractive to multinational corporations because of their wish to protect their shareholders’ interests.
 
“Option C”

Much of the discussion during the hearing centered around “Option C,” a proposal in the discussion draft that would tax all foreign income at a low tax rate and include all items held abroad in the tax base. Option C is proposed as a potential solution to tax base erosion. Chairman Camp described Option C as a “carrot and stick” approach, citing the positive feedback received from the business community when the discussion draft was released. Oosterhuis endorsed Option C, highlighting that it differentiates between sales of products in the United States and in other countries. Oosterhuis also stated that Option C could help to remove tax burden from the consideration process when multinational corporations seek to open new manufacturing facilities or move existing operations. Kleinbard, on the other hand, appreciated Option C in theory but did not believe that the proposal could be administered by the IRS.
 
Repatriation

A concern of several members of the Committee involved repatriation of foreign earnings for use by U.S. companies within the U.S. Some Committee members proposed a hybrid taxation system, allowing repatriation with a lower or nonexistent tax burden. Other members expressed concerns that a permanent reduced repatriated income tax rate would incentivize American corporations to shift operations to lower-tax countries. Oosterhuis and Kleinbard both agreed that the current tax system does not properly address the issue of repatriation. Kleinbard noted that taxing repatriated income would be an opportunity to expand the tax base in a way that does not affect the behavior of the taxpayer.
 
Other Issues

In addition to repatriation and Option C, the hearing touched on several other topics.

  • The interaction between transfer pricing rules and intangible property rights
  • Interaction of certain U.S. tax expenditure reforms and international taxation
  • Value-added tax (VAT) proposals
     

Click here to obtain copies of the testimony from this hearing.


What Does CohnReznick Think?
U.S. multinational corporations have an obligation to their shareholders to legally maximize profits. A critical component of measuring such profits is the multinational corporation’s worldwide effective tax rate. As such, there is an incentive to earn profits in countries with a lower tax rate than the U.S. as the U.S.’s combined federal and state tax rates are among the highest in the world. Without changing the existing international tax rules, U.S. multinational corporations will continue to structure their operations in a manner that legally enables them to reflect a worldwide effective tax rate that is lower than the tax rate applicable to purely domestic U.S. companies.


Contact:

For more information, please contact the following CohnReznick tax professional:

To learn more about CohnReznick’s International Tax services, please visit our webpage.


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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