Tax Analysts Blog

Camp's 'Territorial' Proposal . . . In Three Paragraphs

Posted on Oct 26, 2011
The proposal would eventually eliminate U.S. tax on foreign source income from active business. But the exemption would be limited to 95 percent of foreign profits. (The five percent "haircut" that the Japanese have but the British don't is meant to be a rough-justice substitute for rules to limit the allocation of interest deductions to domestic taxable profits.) There would be anti-abuse rules to prevent excess domestic debt from sheltering U.S. profits from tax. There would be anti-shifting rules--perhaps like those proposed by President Obama(!)--to prevent the most egregious types of profit shifting to tax havens. Foreign affiliates now operating as branches would no longer be able to deduct losses against U.S. income. On the plus side for multinationals: income from intangible assets would retain some sort of favorable tax treatment even though it should be eliminated under a pure territorial system.

Multinationals wanted the option of repatriating approximately $1 trillion of foreign profits at a 5.25 percent rate. Under the Camp proposal, the repatriation would in effect be mandatory. This is a novel idea. It is a little gimmicky, but it will be real pain for some multinationals. This transition rule, along with exemption for future profits, eliminates the lock-out effect. Any international reform worth doing must eliminate the lock-out effect.

The supporting documents released to the public today do not include or mention any official revenue estimate from the Joint Committee on Taxation. A vague claim of revenue neutrality is repeated many times, but validity of the claim is doubtful. First of all, a lot of blanks have to be filled in later. Second, why would businesses applaud a massive restructuring that left them on net with no tax cut and sowed discord by creating winners and losers inside the coalition? Third, in an unjustified leap of legislative faith, Camp assumes we already have a 25 percent corporate tax rate (although he has not the courage to specify how he would pay for it). Moving to a territorial system is less costly if your starting point is a fantasy world where the corporate rate is already 25 percent. Only down in the rabbit hole and in DC!

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