Tax Analysts Blog

Rumor of Radical Change in the President's Budget

Posted on Jan 31, 2010

A totally unverifiable report from a not-so-sure source told me that the budget to be released this Monday a.m. will include a proposal to end the favorable U.S. tax treatment for foreign profits generated in low-tax jurisdictions like Ireland, Switzerland, Bermuda, and the Cayman Islands. If true, this proposal would be the biggest change in international tax law since 1962. Multinational businesses will be apoplectic.

This proposal, if real, could meld nicely with the newly energized effort to get tough on big business and promote middle class jobs.

On a more mundane level the proposal, if real, avoids some of the thorny diplomatic problems of creating "black lists" that has bedeviled similar efforts in other countries. The proposed new rule would be applied mechanically based on the tax rate in each jurisdiction--no painful country-by-country determination required.

This proposal, if real, would be similar to a proposal I made a few years ago in "A Challenge to Conventional International Tax Wisdom," that first appeared in Tax Notes on Dec. 12, 2006. Back then I wrote:

The United States should consider -- in part as a backstop to the transfer pricing rules, and in part to trim the most potent incentives for investment in foreign production -- a modest tightening of U.S. tax rules for active income generated in low-tax countries. One possibility would require U.S. companies operating in low-tax countries to pay an additional U.S. tax on current foreign earnings equal to the difference between a minimum rate of, for example, 20 percent or 25 percent, and the effective foreign rate. U.S. companies would still have incentive to invest offshore, but the largest and most harmful incentives to shift income and investment out of the United States would be eliminated. (This type of targeting by tax rate is sometimes called a "low-tax kick-in.")

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