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Wednesday, May 16, 2012

Avi-Yonah: Camp, Obama, and Territoriality Reconsidered

Tax AnalystsReuven Avi-Yonah (Michigan), Vive la Petite Difference: Camp, Obama, and Territoriality Reconsidered, 66 Tax Notes Int'l 617 (May 14, 2012):

The recent tax reform proposals by House Ways and Means Committee Chair David Camp, R-Mich., and by President Obama seem to offer starkly contrasting visions of how to reform the taxation of foreign-source income earned by U.S.-based multinational enterprises. Both acknowledge the problem, which is that U.S.-based MNEs currently have more than $1 trillion of "permanently reinvested" income offshore, which they cannot bring back to the U.S. without incurring a 35% tax penalty.

However, they seem to offer radically different solutions: Under the Camp proposal, a participation exemption will enable U.S.-based MNEs to bring back the income without paying significant tax. Under the Obama proposal, deferral will be abolished and U.S.-based MNEs will have to pay a minimum tax on foreign-source income earned by their controlled foreign corporations as it is earned. The result would be that the tax penalty on repatriating that income would be reduced because dividends would only be subject to tax at the difference between the statutory rate (reduced to 28% under the Obama proposal) and the minimum rate.

However, a closer look reveals that these proposals have more in common than meets the eye. Specifically, the Obama proposal's minimum tax on foreign-source income of CFCs is perfectly compatible with exempting that income from further tax when it is repatriated, as the Camp proposal envisages. Conversely, the provisions to prevent income shifting in the Camp proposal can in practice result in precisely the minimum tax on the foreign-source income of CFCs that is the centerpiece of the Obama proposal. This level of agreement suggests that a compromise embodying elements of both proposals should not be impossible to reach when tax legislation is enacted after the November election.

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