Tax Analysts Blog

Obama's Foreign Earnings Tax: 19 Percent Minimum DOA but Deemed Repatriations Key

Posted on Feb 2, 2015

President Obama's February 2 budget will propose a 19 percent minimum tax on foreign earnings. When news broke over the weekend about the plan, all of the headlines focused on this new levy, which is designed to minimize the benefits of shifting profits and income out of the United States and into tax havens. The president has pushed such a minimum tax before, of course, but the 19 percent rate is new. While the minimum tax may be grabbing most of the headlines, it's the second component of the president's plan, a one-time 14 percent tax on deemed repatriations, that is far more important.

Republicans won’t accept a minimum tax on foreign earnings, even if it still allows for foreign tax credits (which Obama's plan would). The GOP didn't get behind a minimum tax when former Senate Finance Committee Chair Max Baucus wanted to use it to help make tax reform revenue neutral, and the party obviously hasn't been in favor of any of the president's budgets. So while a minimum tax might seem the easiest and most effective way to combat base erosion, it's basically dead on arrival in Congress.

But Obama's deemed repatriation tax isn't all that unreasonable of a plan. The idea of using a reduced rate to tax profits permanently reinvested overseas has been a part of almost every serious international tax reform plan for the last several years. Obama's 14 percent rate isn't all that much higher than the 8.75 percent rate in former House Ways and Means Committee Chair Dave Camp's plan to tax those earnings. Critically, both the president and Camp have proposed using that revenue to pay for long-term infrastructure spending. Obama would earmark the $238 billion in one-time revenue from the repatriation tax to help fund a six-year, $478 billion reauthorization of surface transportation spending. Viewed through this lens, it looks like Obama's repatriation tax is more of an opening bid in a bipartisan negotiation, rather than a combative stance designed to drive a wedge between Republicans and the White House (which, of course, seemed to be the sole purpose of his State of the Union address).

There are problems with a deemed repatriation tax, of course. Many consider it retroactive taxation. Others find it fundamentally unfair that corporations should be expected to make up for shortfalls in Highway Trust Fund revenues that are supposed to come from levies, like the gas tax, that are more closely tied to transportation. And it's not all that clear how many rank-and-file Republicans actually supported the Camp plan. Probably not many, based on the reactions it got during its initial release.

Leaving all the problems aside, however, it should be encouraging that the president took a section of a Republican tax reform plan and essentially endorsed it. And the repatriation tax, unlike items such as the bank tax or other revenue raisers in Camp's bill, is something that could be considered a stand-alone plan. It was a specific way to raise revenue to pay for infrastructure spending. Lawmakers and policy observers would do well to pay much more attention to this part of the president's budget, and largely ignore a minimum tax that has minimal support on Capitol Hill.

Read Comments (4)

robert goulderFeb 2, 2015

So, under this plan, if a U.S. multinational were to earn foreign profit in the
U.K. (subject to 21% corp rate) the foreign tax credit would completely offset
U.S. corporate tax. Right? That seems like the functional equivalent of a
territorial outcome for countries with corp rates higher that the U.S. minimum
tax (19%). That how you read it?

vivian darkbloomFeb 2, 2015

@robert goulder

I think you are mostly engaging in semantics. Does the United States have a
territorial system *today* if a US multinational were to earn foreign profit in
the Country X subject to 40 percent tax?

One needs a lot more details on this proposal. Does the plan envisage a per
country test? Would that "excess" 2 percent tax in your UK example be
creditable against profits from a jurisdiction where the tax rate is 17
percent? (or carried forward to offset future earnings attributable to the
UK)? Does this proposal call for one large global "mixing bowl"?

Would US multinationals need to go through the complex and burdensome task of
calculating each separate subsidiary (and country) earnings under US tax
principles? Most territorial systems eliminate the immense complexity and cost
of a credit system by not requiring that. That is what largely distinguishes a
territorial system from the US foreign tax credit system. The benefit of a
territorial system is as much the reduction of complexity and overhead as it is
the (potential) reduction in overall tax. The proposed system seems to be
designed to eliminate deferral but to maintain much the same foreign tax credit
mechanism we currently have (albeit against a lower US marginal rate) with all
complexity and attendant cost. If the lower rates are "paid for" by
eliminating deferral and some corporate deductions, it appears to be
"lose-lose" for those multinationals. And, in the worst tradition of
unintended consequences, it would likely encourage US multinationals to
eliminate much of their foreign tax planning in which they lower their
*foreign* tax burdens. There would likely be a short-term increase in US
revenues as a result of the one-time taxation of accumulated earnings. But,
over time, this would encourage US multinationals to move out of some
jurisdictions (e.g. Ireland) and and move into others (e.g. Germany) and all
that at huge restructuring costs. But, when all is said and done, it is likely
the effective global tax rate of US multinationals would go up (and their
competitiveness down) at no net increase, or even a decrease in tax revenues
for the US.

christopher berginFeb 3, 2015

"Obama's deemed repatriation tax isn't all that unreasonable of a plan," Jeremy
Scott, editor in chief of Tax Analysts commentary wrote. "The idea of using a
reduced rate to tax profits permanently reinvested overseas has been part of
almost every serious international tax reform plan for the last several years."
("Dealbook, The New York Times, Feb. 3, 2015, p. B1; quote on p. B6.)

edmund dantesFeb 4, 2015

"Obama's 14 percent rate isn't all that much higher than the 8.75 percent rate
in former House Ways and Means Committee Chair Dave Camp's plan to tax those
earnings."

It's 60% higher than Camp's plan, you have a funny idea of what "all that much"
means. I could say that Obama's rate is double Camp's rate and be more
accurate.

We already bought major infrastructure spending with the stimulus plan back in
2009--what happened to all that money? Why does everything have to be fixed all
over again? Or is this promise of targeted spending just another lie to drum
up some political support?

How about we just stop stealing from the highway trust fund for non-highway
projects? We'd have all the money we need for highway repair in that case.

This would indeed be a retroactive tax, and an unconstitutional one to boot.
With this much money at stake, expect some pushback from the affected companies.

Make the repatriation tax rate 5%, and make the repatriation voluntary, and we
could be looking at some meaningful economic growth for a change. If that's
what we want.

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