A move to roll back a major anti-base-erosion mechanism in the House tax reform plan has sparked criticism that the bill would dramatically increase the offshoring of corporate profits, but some tax professionals argue that the provision was unnecessarily harsh to begin with.
The corporate excise tax in the Tax Cuts and Jobs Act (H.R. 1) targeted certain payments other than interest made by a domestic corporation to a related foreign corporation that can be: deducted, included in costs of goods sold, or included in a depreciable asset basis. Those payments would be subject to a 20 percent excise tax unless effectively connected with a U.S. trade or business.
However, while an amendment from House Ways and Means Committee Chair Kevin Brady, R-Texas, kept the excise tax in place, it substantially expanded the number of deductions that corporations could claim against that tax and would allow them to partially claim the foreign tax credit.
“The one real safeguard in this plan, which would have made it a little harder for corporations to artificially book their U.S. profits overseas in tax havens, is all but gone,” Clark Gascoigne of the Financial Accountability and Corporate Transparency Coalition said in a November 8 statement. “As a result of last night’s change, the estimated revenue generated from this provision dropped 95%,” he added.
The original version of the provision would have raised $154.5 billion over a decade, but with the changes from the Brady amendment, the Joint Committee on Taxation estimated it would now raise only $7 billion.
Richard Phillips of the Institute on Taxation and Economic Policy said he also believes that the provisions “probably would have been effective,” and added that he was “really surprised when I found that it had been gutted so deeply by the amendment.”
“We wanted there to be less offshore tax avoidance and actually raise money on the international side,” Phillips said. Without the punch packed by the initial corporate excise tax provision, there are only two major anti-base-erosion provisions: the earnings stripping rule and foreign minimum tax.
The earnings stripping rule “is a good rule,” but it, along with the minimum tax, “only brings back half of what you’re losing from the move to territorial,” Phillips said. Meanwhile, the minimum tax is “extremely weak” and comes with many carveouts for different types of profits, he said.
But Adam Michel of the Heritage Foundation countered that he views the first iteration of the excise tax as “draconian” and driven more by concerns over revenue than policy. He told Tax Analysts that it “undermined many, if not all of the benefits of moving to a territorial system in the first place,” and added that Brady’s amendment “definitely moved it in the right direction.”
Michel acknowledged that the bill does need to include some anti-base-erosion tools, and pointed to the 10 percent minimum tax on high returns as an example that he deemed an “OK compromise.”
Similarly, John L. Harrington of Dentons US LLP told Tax Analysts that the excise tax is “very controversial, and deservedly so.”
Harrington argued that while it has been described as an anti-base-erosion mechanism, “that assumes that the U.S. had a right to tax the foreign corporations’ income in the first place.” The income subject to the excise tax is income that is earned outside the U.S. from activities conducted outside the U.S., he said.
“The provision really is better viewed as the United States grabbing income outside its territory than it is a foreign corporation skirting the U.S. tax rules,” Harrington said.
The dramatic revenue loss due to the changes in Brady’s amendment was an attempt to “mitigate some of the unfairness of the provision,” he said.
Partial restoration of the foreign tax credit was appropriate, according to Harrington, because the income being taxed by the U.S. was earned in another country. He also said the original proposal was overly broad in subjecting income to the U.S. corporate tax.
“I viewed the changes made by the amendment as trying to save what was left of the provision rather than as some sort of concession to affected companies,” Harrington said.
There already is some speculation that the Senate’s version of the tax bill could do away with the corporate excise tax altogether, according to CNBC. That news was viewed as a win by some conservative business advocates.
Speaking of the excise tax in a November 8 statement, Freedom Partners Vice President Nathan Nascimento wrote, “We always felt that this new consumer tax was fixable, and eliminating it altogether is a fix we can get behind. If the reports are true, the Senate’s decision to take a different path would be an encouraging indication that Congress is committed to keeping its promise by delivering on a simpler and fairer tax code — without placing new burdens on consumers.”
Correction, November 9, 2017: Phillips said that the earnings stripping rule, combined with the foreign minimum tax, raise only half the revenue that would be lost from moving to a territorial system.
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