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News : US Economy Last Updated: Nov 21, 2013 - 6:50 AM

US minimum foreign tax rate proposed; Ireland at risk
By Michael Hennigan, Finfacts founder and editor
Nov 20, 2013 - 8:58 AM

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US corporate tax in recent years has fallen to just 2% of GDP.

The chairman of the US Senate Finance Committee on Tuesday unveiled an international tax reform "staff discussion draft," which provides for a foreign minimum tax that could be  20% or more. Low or no tax jurisdictions such as Ireland would be hit by such a measure.

The proposal from Senator Max Baucus - - the first in a series of discussion drafts to overhaul America’s tax code - - details ideas on how to reform international tax rules to spark economic growth, create jobs, and make US businesses more competitive. Additional tax reform discussion drafts will be released later this week.

Senator Baucus said he believes tax reform should motivate businesses to bring jobs and money back to the U.S.  The discussion draft outlines proposals to:

  • Make the US more attractive and competitive for multinationals to invest and create jobs;
  • Reduce incentives for US companies to move jobs or the entire company overseas;
  • End the trapped cash problem, allowing foreign profits to be invested in America again;
  • Make it harder for multinationals to shift profits to tax havens, which reduce our ability to invest in U.S. infrastructure, education, and other vital initiatives.

The US headline corporate rate of 35% is the highest in the developed world but firms with significant international business such as tech and pharmaceutical companies, generally pay a much lower rate.

Apple's tax rate on foreign profits is about 2% while in 2012, Google's was just over 4%.

US firms' overseas profits are generally not liable for payment of US tax until they are repatriated and companies currently have retained about $2tn offshore. However, some of the overseas cash may in reality be in the US or invested in for example US Treasuries.

The Baucus plan would levy  a temporary corporate tax on offshore money at a rate of up to 20% payable over 8 years, which would raise more than $200bn in tax revenues. The draft is also designed to improve competitiveness by moving the US closer to  a "territorial" system where foreign profits are only taxed once.

The senator did not specify a new headline rate but he said it should be under 30%. 

Bloomberg News says that if the rate was set at 28%, for example, the minimum tax would be set at 22.4%.

"That rate would apply to a company’s earnings in each jurisdiction, so that companies operating in high-tax areas would owe no incremental US tax on their foreign earnings. A company operating in Ireland, by contrast, would effectively have to pay the US the difference between the Irish tax rate of 12.5% and 22.4%."

A second option would set a lower minimum tax rate, 60% of the US rate, while narrowing the definition of income eligible to only income from active business operations. Other income would be taxed at the full US rate immediately.

The recent rise in US companies moving head offices to Ireland and the Netherlands would also be targeted.

Documents issued by Senator Baucus

Finfacts: US company profits per Irish employee at $970,000; Tax paid in Ireland at $25,000

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