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January 17. 2014

ACT Submits Comments on Senate Finance Committee Staff’s Tax Reform Discussion Drafts

WASHINGTON, D.C. – Today, the Alliance for Competitive Taxation (ACT), a coalition made up of leading American businesses, submitted comments to the Senate Finance Committee regarding the tax reform discussion drafts released by Chairman Baucus and the Committee staff in late 2013.

ACT believes tax reform remains a crucial opportunity for the United States to promote economic growth and job creation. We applaud the time and effort the Finance Committee has dedicated to the cause of tax reform, and encourage the Committee to continue its work with the goals of achieving a 25-percent corporate rate and establishing a globally competitive tax system that aligns the United States with the rest of the world.

However, ACT is concerned that the international tax reform ideas in the Finance Committee staff draft undermine the Chairman’s stated goals of strengthening our economy, making America more competitive in the global market, simplifying the tax code and creating jobs. Unfortunately, many ideas expressed in the Finance Committee’s proposals would favor foreign companies over American businesses while costing American jobs and hurting our competitiveness.

A summary of ACT’s comments is available below. ACT’s comments are available in full online:

 

SUMMARY: ACT COMMENTS ON FINANCE COMMITTEE STAFF DISCUSSION DRAFT ON INTERNATIONAL BUSINESS TAX REFORM

The Minimum Tax Proposals (Options Y and Z) Would Hurt U.S. Jobs & Growth

Description of Proposal

  • The Staff Discussion Draft (“the draft”) would impose substantial U.S. tax on the active foreign earnings of foreign subsidiaries of American companies that are reinvested abroad, while multinationals headquartered outside the U.S. typically pay no home country tax on such earnings. Within the OECD, 93 percent of the non-U.S. companies in the Global Fortune 500 in 2012 are headquartered in countries that use territorial tax systems. While other countries are reforming their international tax systems to be more competitive and territorial in nature, the draft’s inclusion of a per-item minimum tax goes in the opposite direction.

The draft disadvantages American companies competing against foreign businesses in foreign markets

  • Under the draft, a U.S. corporation that purchases or runs a foreign subsidiary that has all of its operations and sales outside of the United States would be subject to a U.S. minimum tax. By contrast, a foreign competitor could purchase or operate the same subsidiary without any current home country taxation of the subsidiary’s active business income.

The draft would enrich foreign governments at the expense of American workers

  • The draft would cause much of the additional tax burden imposed on U.S. companies to be paid to foreign governments instead of the U.S. Treasury. Under Option Y, foreign governments would have no reason to provide tax incentives to U.S. companies when doing so would result in a foreign rate below the U.S. minimum tax rate. Similarly, U.S. companies would have no incentive to structure their foreign investments to reduce foreign taxes below the U.S. minimum tax rate. The tax savings that would have been retained by a U.S. company and its workers will instead flow to foreign coffers, effectively creating a new foreign aid program benefiting some of the wealthiest nations in the world.

The draft would make the U.S. a less attractive location for the headquarters of global companies

  • By imposing a minimum tax on active foreign business income, the draft would make the United States an even less attractive location for corporate headquarters and further increase the number of U.S. companies acquired in international mergers and that reincorporate abroad.

The draft would increase the complexity of the tax code

  • Option Y would require companies to measure the effective foreign tax rate on each item of foreign income, necessitating identification of discrete items of gross income, allocation and apportionment of expenses related to each item of gross income, and then a determination of which foreign taxes are attributable to each item of foreign income. This is the opposite of simplification.

Conclusion

  • ACT commends the Chairman and the staff for their commitment to comprehensive tax reform and the extraordinary amount of time and effort that has been devoted to drafting detailed international tax reform proposals. Unfortunately, if enacted, this proposal would have the dubious distinction of making one of the world’s least competitive tax codes even worse and would accelerate the loss of U.S. jobs and U.S. companies. Tax reform should transition the United States to a modern international tax system, similar to the systems used by other developed countries. The draft’s minimum tax proposals would increase the pace of U.S. businesses moving their global headquarters abroad and decrease the competitiveness of U.S. businesses – with adverse effects on U.S. employment, exports and R&D, and increased complexity of the code.

The Transition Tax, Interest Expense Allocation Rules, Withholding Tax on Portfolio Interest, & Foreign Entity Classification Rules Would Hurt U.S. Jobs & Growth

The transition tax would subject U.S. companies to a tax not paid by competitors and reduce investment

  • The draft would subject U.S. companies to a 20% tax on accumulated foreign earnings, without regard to whether that income was reinvested in plant, property, or equipment. None of the 28 OECD countries with territorial tax systems imposed a transition tax on the income previously earned and reinvested abroad by foreign subsidiaries. For U.S. companies facing cash constraints, the effect of the transition tax would be to reduce investment at home and abroad. The 20% retroactive tax is estimated to raise more than twice as much revenue as U.S. companies are projected to pay over the next 10 years on repatriated foreign earnings under current law.

The interest expense allocation rules would reduce domestic investment and encourage foreign acquisition of U.S. companies

  • Unlike the 28 OECD member countries that have territorial systems, the draft would make certain domestic interest expenses a “stateless deduction” – i.e., not deductible in any jurisdiction. This would create a powerful incentive for foreign takeovers of U.S. companies and for U.S. companies to re-incorporate abroad so they could deduct all of their U.S. interest expense. It would also discourage American-headquartered companies from investing in the United States in cases where domestic interest deductions would be lost.

The withholding tax on portfolio interest would reduce domestic investment while providing little benefit to the U.S. Treasury

  • The draft would reverse 30 years of tax policy and reinstate a 30-percent withholding tax on interest paid on corporate obligations held by foreign investors owning less than 10 percent of the stock of the U.S. borrower. This provision was repealed in 1984 because it made it difficult for U.S. corporations to raise capital in the Eurobond market. The main effect of this provision would be to limit the market for U.S. corporate debt obligations to treaty country residents, driving up borrowing costs and reducing domestic investment even in situations where no tax is withheld and paid to the U.S. Treasury. By contrast, companies based in any of the 28 EU member states can issue debt to EU investors without any withholding tax.

The repeal of current foreign entity classification rules would enrich foreign governments at the expense of domestic investment

  • The draft would prevent the use of common structures that are created solely for purposes of reducing foreign tax. The proposal would accelerate the trend of U.S. multinationals re-incorporating abroad because the loss of the existing rule would make it more difficult for U.S. multinationals to compete with foreign-based multinationals.
  • A narrower version of this proposal was contained in the Administrations FY 2010 Budget but was dropped in subsequent budgets because much of the revenue raised from the proposal would fill the coffers of foreign governments rather than the U.S. Treasury.

 

SUMMARY: ACT COMMENTS ON FINANCE COMMITTEE STAFF DISCUSSION DRAFT ON COST RECOVERY AND ACCOUNTING TAX REFORM PROVISIONS

Base Broadening is Necessary to Achieve a 25% Rate in a Revenue Neutral Way

  • The draft does not propose a specific corporate rate that would be achieved through the Committee’s proposals. ACT members strongly support a reduction in the U.S. corporate tax rate to 25 percent achieved through base broadening in a revenue-neutral manner, using traditional Joint Committee on Taxation revenue scoring conventions and practices.
  • To assure that the United States is an attractive location for investment, cost recovery deductions only should be slowed in the context of tax reform that reduces the statutory corporate tax rate to 25 percent. The competitiveness of the U.S. tax system is a function of the combination of the tax base – including cost recovery rules, tax accounting rules, and other provisions – and the statutory corporate tax rate.
  • Two concerns identified below are matters that we believe can be addressed and we look forward to working with the Committee on them.

Items That Require Further Attention

  • For some industries and taxpayers the proposed recovery system could result in depreciation deductions slower than economic depreciation. Adjustment should be made where the data support the conclusion that the proposed recovery rates are slower than economic depreciation.
  • The application of new cost recovery rules to pre-enactment investments is a retroactive measure that changes the rules “in the middle of the game.”  Taxpayers made investments in good faith reliance on the ability to claim future depreciation deductions under the recovery rates in place at the time the investments were made. This reliance has historically been respected when prior changes to depreciation rules have been enacted. Because of this, the application to existing investments should be revisited to avoid undermining taxpayers’ confidence in the stability of the tax code to the detriment of future investment.

Working Together on Next Steps

  • ACT commends the Chairman and the staff for their commitment to comprehensive tax reform and the extraordinary amount of time and effort that has been devoted to conceptualizing and drafting detailed proposals for cost recovery and accounting tax reform.
  • ACT members recognize that the base broadening proposed in the draft may be insufficient to achieve a 25 percent rate. ACT would welcome the opportunity to work with the Committee to find ways to bring the corporate rate down further to a more internationally competitive level.
  • Tax reform is a crucial opportunity for the United States to promote economic growth and job creation.  ACT encourages the Finance Committee to continue its work with a goal of achieving a 25-percent corporate rate and a globally competitive tax system that aligns the United States with the rest of the world.