Tax Analysts Blog

Nunes Plan Ignores Base Erosion Concerns

Posted on Jan 13, 2015

Another lawmaker has thrown his hat into the tax reform ring. Republican House taxwriter Devin Nunes released a business tax reform plan last week that would gradually lower tax rates to 25 percent and move to full expensing. Nunes's plan shifts U.S. international tax rules toward territoriality and imposes a 5 percent tax on a company's undistributed earnings. He says that when it is scored, it will be revenue neutral. Sounds great, right? Well, Nunes has decided to completely ignore the problem of U.S. tax base erosion, saying when pressed that those concerns are "irrelevant" because he is creating a new tax code.

Both former House Ways and Means Committee Chair Dave Camp and former Senate Finance Committee Chair Max Baucus struggled with base erosion concerns in their tax reform drafts. Camp tried to tweak subpart F to make it function more effectively, and he initially proposed a series of options for how to protect the U.S. corporate tax base. His final bill included a one-time tax of 3.5 or 8.75 percent on foreign earnings. Baucus tried to create a minimum tax, and also had options (Y and Z) for dealing with the so-called lockout effect, which encourages U.S. companies to keep earnings offshore rather than repatriate them to the United States.

Nunes's proposal would essentially repeal subpart F. Only section 965, which was the temporary dividends received deduction, would survive the lawmaker's chopping block. It would allow unused foreign tax credits to be treated as general business credit carryovers, but it wouldn't allow indirect foreign tax credits for taxes paid by a foreign subsidiary. Nunes would essentially eliminate the entire anti-deferral regime in the tax code.

Nunes introduced his plan late last week, so there wasn't much time for anyone to really react. Fellow Republicans praised him for putting it forward, but cautioned that they hadn't read it yet. Ways and Means Democrats were even more measured. Rep. Richard Neal thought that eliminating most deductions might be going too far, while New Jersey Democrat Bill Pascrell Jr. took the opportunity to criticize Camp for leaving Democrats out of the tax reform process last year. The White House had nothing to say, but Nunes commented that he didn't expect the president's support.

And, frankly, he shouldn't. Leaving aside the fact that President Obama's political priorities are much different from Nunes's, the White House is highly unlikely to work with a tax reform plan that essentially ignores the most pressing issue facing the U.S. corporate tax base today. Simply lowering the rate to 25 percent won’t stop base erosion -- not when companies can achieve much lower rates than that by using countries such as Ireland, Luxembourg, and other tax havens.

A credible business tax reform proposal must address base erosion concerns. It must include options for preventing companies from engaging in aggressive income shifting, and it has to include detailed rules for dealing with intangible income. Camp recognized this. Criticism of his base erosion options bedeviled his tax reform efforts right from the start. What little effort Obama has made on international tax reform in the last few years has been pushing a tax on excess returns. All Nunes has done is slap a 5 percent tax on undistributed earnings and airily dismiss every other concern about income shifting. It simply isn't realistic to dismantle subpart F and say everything is fine because the old tax code is irrelevant.

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