The Senate Finance Committee holds a hearing today on The U.S. Tax Code: Love It, Leave It or Reform It!:
- Mihir Desai (Harvard University)
- Peter Merrill (PricewaterhouseCoopers)
- Leslie Robinson (Dartmouth College)
- Pascal Saint-Amans (OECD)
- Allan Sloan (Fortune)
- Robert Stack (U.S. Treasury Department)
In connection with the hearing, the Joint Committee on Taxation has released Present Law and Background Related to Proposals to Reform the Taxation of Income of Multination Enterprises (JCX-90-14) (99 pages):
This document ... includes a description of present law, background on recent global activity related to the taxation of cross-border income, and descriptions and a comparison of recent proposals to reform the U.S. international tax system. ...
The U.S. international tax rules provide worldwide taxation of all U.S. persons on all income, whether derived in the United States or abroad, but allow deferral of U.S. taxation of much foreign business income derived by foreign subsidiaries of U.S. companies. The rules provide territorial-based taxation of U.S.-source income of nonresident aliens and foreign entities. Part I of this document describes in more detail the rules applicable to inbound investment (the U.S. activities of foreign persons) and outbound investment (the foreign activities of U.S. persons).
The U.S. rules for the taxation of cross-border income have been the subject of much criticism. Critics have had a few broad, sometimes conflicting policy concerns. On the one hand, critics have argued that the U.S. tax burden on the foreign business income of U.S. companies is too high, particularly when U.S. multinational companies are competing in foreign markets with foreign multinational firms that are subject to little or no home-country tax on foreign income. Commentators also have argued that the U.S. tax rules discourage U.S. companies from investing foreign earnings in the United States and favor reinvestment of the earnings abroad, even when the pre-tax rate of return on the potential U.S. investment is higher than the pre-tax rate of return on the potential foreign investment. On the other hand, critics have expressed concern that under the U.S. rules for taxing cross-border income, both U.S. and foreign multinational companies reduce the amount of U.S. tax they pay by shifting profits reported for income tax purposes outside the United States and, in some cases, by shifting manufacturing, headquarters, and other business activities outside the United States. Policy makers and commentators in countries other than the United States have expressed similar concerns about the competitiveness of home country firms, about profit shifting by U.S. and home country firms, and about the erosion of the corporate tax bases of those countries by U.S. and home country firms. Part II of this document describes these policy concerns.
Governments around the world have responded to these policy concerns in various ways. The Organisation for Economic Co-operation and Development (“OECD”) has undertaken an initiative on base erosion and profit shifting. The European Union and several of its member states have introduced proposals or enacted laws that deny tax benefits in arrangements in which companies might otherwise derive low-tax or zero-tax cross-border income. Some countries have legislation intended to attract intellectual property development or ownership. In the United States, the Administration’s budget proposals include a number of proposals intended to restrict profit shifting, particularly in respect of intangible property income, by U.S. multinational companies and to reduce erosion of the U.S. tax base by foreign multinational companies. Members of the U.S. Congress, including Senate Finance Committee Chairman Ron Wyden, former Senate Finance Committee Chairman Max Baucus, Senator Mike Enzi, and House Ways and Means Chairman Dave Camp, have made public or have introduced legislation to reform the U.S. international tax rules. These reform proposals replace deferred U.S. taxation of the business earnings of foreign subsidiaries of U.S. companies with either full current U.S. taxation of foreign subsidiary earnings or a mix of current U.S. taxation of the earnings and exemption from U.S. taxation. Parts III and IV of this document describe recent global (Part III) and U.S. (Part IV) policy responses, and Part V of this document compares the recent U.S. proposals across several dimensions.