GOP looks at international tax revamp


Republicans are working on a plan that would end the taxation of most foreign profits earned by U.S. corporations, K Street sources have told The Hill.

Sources say GOP lawmakers on the House Ways and Means Committee are working on a draft proposal that would shift the U.S. to a so-called “territorial” tax system, in which companies would basically only be taxed on profits made within American borders.

The Ways and Means plan would not be a fully drafted bill, but instead a proposal that would allow business groups and other stakeholders to offer suggestions.

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As of now, it is not clear when the panel will release its scheme, though some lobbyists expect it as soon as Friday. But either way, the draft proposal is another sign that Congress, and its tax-writing committees, could be ready to take steps forward on broad tax reform, after panels in both the House and the Senate have held a string of hearings on the issue this year.

The new Ways and Means plan could also indicate that the committee is not waiting on the supercommittee to proceed on a tax overhaul, with some in Washington speculating that the deficit-reduction panel could include tax reform guidelines in its recommendations.

A Ways and Means spokeswoman would not comment specifically on whether the committee was working on a territorial plan, but did say that revamping America’s current “outdated international tax system” would be a key objective for any tax reform package.

“Critical to achieving that goal is gathering stakeholder input from practitioners, academics and businesses who will be directly impacted by a transformed international system, such as a territorial approach,” the spokeswoman said.

As it stands, American companies are taxed on profits they make anywhere in the world and face, at 35 percent, one of the highest corporate tax rates in the industrialized world — though, under a process known as deferral, businesses can also postpone paying their U.S. taxes on foreign profits until those funds are brought to this country.

With that in mind, backers of the territorial system — including some top congressional Republicans — say pairing that change with a lower corporate rate would both boost American multinationals within the global marketplace and entice them to bring more of their profits home.

Those supporters also point out that other industrial economies, like Great Britain and Japan, have moved to a territorial system in recent years.

“We also need to move, I think, to a territorial tax system so that we can compete around the world,” Rep. Dave Camp (R-Mich.), the Ways and Means chairman, said in June.

Most Republicans on the Senate Finance Committee — including the panel’s ranking member, Sen. Orrin HatchOrrin HatchPETA’s call for bacon defense sparks response from Hatch Medicaid becomes big threat to GOP’s healthcare revival Unresolved issues, very little time for Senate GOP MORE (R-Utah) — also called for a territorial system in recommendations sent to the deficit-reducing supercommittee last week. And Mitt Romney, a leading contender for the GOP presidential nomination, likewise favors the move.

Camp and House Republicans have backed the idea of lowering both the top corporate and individual tax rates to 25 percent, while also eliminating some tax credits and deductions. 

The Obama administration has also expressed an interest in tax reform, and has been working on a proposal to revamp the corporate code. 

Other Democrats, meanwhile, have trodden cautiously around the idea of a territorial system, saying, for instance, that policymakers would need to look at transfer pricing — the process by which multinationals can essentially shift services and goods to foreign subsidiaries to reduce their domestic tax bill. 

“We need to move beyond the current easy rhetoric about a move to a territorial system because it does have the potential to encourage American corporations to shift more of their income and jobs overseas,” Rep. Sandy Levin of Michigan, the ranking Democrat on Ways and Means, said in June.

But Rosanne Altshuler, an economics professor at Rutgers, told The Hill on Tuesday that moving to a territorial system might not be such a heavy lift.

Altshuler, also a former director of the Urban-Brookings Tax Policy Center, termed the current hybrid approach of allowing U.S. companies to defer taxes on worldwide profits inadequate, and applauded policymakers for taking a serious look at it. 

“I do think what’s most important is getting tax rates down,” said Altshuler. “But then I think it’s important to improve the current international system, which I would characterize as the worst of all worlds.”

Elsewhere, tax reform has been a topic of discussion for the supercommittee, which has to unveil its plan by Nov. 23. But many veteran tax observers are skeptical that the panel could craft a full-fledged overhaul of the tax code by its deadline.

The Ways and Means proposal is also getting talked up as corporations like Cisco and Oracle are lobbying hard for a corporate tax holiday, which would temporarily allow multinationals to repatriate offshore funds at a drastically lower tax rate.

A number of repatriation supporters have termed the holiday a step toward enacting a territorial system, but others in the business community, like IBM, are worried it could be a distraction from that goal.

Some in the lobbying world also believe that the Ways and Means territorial plan could have an impact on the corporate holiday push — by, if nothing else, causing a ripple effect in the discussion of how to tax foreign corporate profits.

“The Rubik’s Cube dynamic here means that nothing can move on territorial without impacting strategy on repatriation,” one K Street hand said.

— Originally posted at 1:23 p.m. and updated at 8:25 p.m.