Baucus proposes minimum tax on U.S. firms’ foreign profits

By Sam Obenhaus

Senate Finance Committee Chairman Max Baucus (D-MT) is pushing forward with tax reform.  On November 19, he released a draft bill that proposes changes to the way the IRS taxes foreign earnings of U.S. corporations.

Under current law, the U.S. operates a modified residential taxation system that stands in contrast to the territorial system used by most other countries.  Under the U.S. system, U.S. multinational firms must pay U.S. taxes on income earned abroad with a few exceptions.  Most importantly, deferral provisions in the U.S. tax code allows companies to avoid paying U.S. taxes on foreign income until they decide to repatriate that money back to the U.S.  This, of course, creates a disincentive to bring money back to the U.S.

Baucus’s draft addresses a few of these issues while maintaining the U.S.’s rather unique worldwide taxation regime.  Instead of moving to a territorial system, Baucus proposes to do away with deferral.  His plan calls for immediately imposing a tax on U.S. firms’ foreign earnings but at a lower statutory rate.  It would also limit some of the mechanisms U.S. corporations use to shift income-generating assets from the U.S. to low-tax jurisdictions abroad.

The proposal has been met with mixed a mixed reception.  Some businesses, especially those without significant international operations, came out in support of the proposal.  U.S. multinationals were less enthused.  And at least one Senate Finance Committee Republican, Sen. Rob Portman (R-OH), did not reserve judgment.  “I fear that if we have a minimum tax under a worldwide system, it will encourage more U.S. companies to incorporate overseas,” he said.