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News : US Economy Last Updated: Feb 24, 2014 - 10:15 AM

Corporate Tax 2014: White House and Congress to publish US reform proposals
By Michael Hennigan, Finfacts founder and editor
Feb 21, 2014 - 5:34 AM

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American companies reported earning 43% of overseas profits in Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland in 2008, while hiring 4% of their foreign workforce and making 7% of their foreign investments in those economies. In comparison, the traditional economies of Australia, Canada, Germany, Mexico and the United Kingdom accounted for 14% of American MNCs overseas’ profits, but 40% of foreign hired labor and 34% of foreign investment. The discrepancy between where profits are reported and where hiring and investment occurs, as examples of business activity, has increased over time. Source: Congressional Research Service (see report links below)

Corporate Tax 2014: In the coming two weeks, the White House and Congress are expected to publish reform proposals to address pervasive US corporate tax avoidance, that likely also includes evasion.

The Wall Street Journal reports, citing administration officials, that new proposals to tackle corporate tax avoidance will be included as part of the White House budget package for the fiscal year 2015, to be released March 4. Meanwhile in Congress, Dave Camp, chairman of the tax-writing House Ways and Means Committee, told Republican colleagues in an e-mail this week that he will release a draft of his tax reform plan next week, saying that “the American people are fed up” with lawmakers’ inaction and “Washington needs to wake up…and start debating real policies and offering concrete solutions to strengthen the economy and help hardworking taxpayers.”

The Journal says that the new White House proposals would, among other things, tighten rules for digital transactions that some companies design to limit the taxes they pay on certain income. It would also address a move by some companies that load up on debt in their US operation—generating large deductions—and then use that capital to shift profits overseas.

The changes would also make it more difficult for companies to arbitrage different tax rules in certain countries, where one country might treat a hybrid instrument as debt while another country treats the same instrument as equity.

Also on Thursday, the administration announced a number of technical adjustments to the 2010 law aimed at combating offshore tax dodging by US citizens. The law, known as the Foreign Account Tax Compliance Act (FATCA), requires information reporting to the US by foreign financial institutions and foreign governments.

FATCA has emerged as a global standard as countries seek information on their own citizens’ offshore money and the US has signed agreements with 22 countries while discussions are ongoing with many other countries.

Representative Dave Camp has said in the past that his goal was to cut top individual and corporate federal tax rates to 25%, but to meet that goal, while aiming to have reforms that are revenue neutral, popular tax allowances/ preferences would have to be targeted.

The Michigan Republican favours a territorial corporate tax system where overseas profits would not be subject to US tax but as a territorial tax could increase the scope for profit shifting, anti-abuse rules would have to be tightened to prevent the greater use of low-tax or no-tax jurisdictions.

“We … know that many in Washington are scared by the prospects of tax reform; they don’t want to look special interests in the eye and say the game is up. Well, it is. We simply cannot afford the business-as-usual mentality that keeps Washington comfortable, but complacent,” Camp wrote in an email sent on Wednesday.

Meanwhile in Paris, work on the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project continues, with the first outputs expected for September 2014 and the completion of the project by the end of 2015.

This is an election year in the US and little progress is expected on tax reform. So 2015 is the year that the biggest overhaul of the tax system since 1986, could happen.

On Thursday we reported on a proposal from Robert Pozen, a businessman turned academic, for "a global competitiveness tax of roughly 17% on all foreign profits of US corporations. The tax could not be deferred."

Pozen argues that most foreign profits currently escape US tax and the proposed foreign profits tax would help to lower the federal rate to 30% while avoiding the likely fruitless effort to abolish popular tax allowances/ preferences.

Congressional Research Service 2013:

Tax Havens: International Tax Avoidance and Evasion [pdf]

An Analysis of Where American Companies Report Profits: Indications of Profit Shifting  [pdf]

Selection of Finfacts tax reports 2013/14:

Irish Corporate Tax 2014: How official spin and distortion works - in short-term

Corporate Tax 2014: US proposal of 17% rate for foreign profits

Corporate Tax 2014: Obama running with the hare and hunting with the hounds

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

Corporate Tax 2014: Yahoo! joins “Double Irish Dutch Sandwich” club; IDA Ireland wants more members 

Corporate Tax: Kenny reassures Facebook but Ireland's rate is too high

Foreign government requests Bermuda to investigate Microsoft's Irish-linked subsidiaries

G-20 Australian presidency focuses on tax "leaking bucket"; Ireland still in denial?

Corporate tax reform and the biggest tech tax havens

Ireland's new International Tax Charter: More political kabuki

Ireland's tax man for Silicon Valley

Corporate Tax 2014: UK's revenues plunge; France considers reform

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