Summary of Baucus Discussion Draft to Reform International Business Taxation

Senate Finance Committee Chairman Max Baucus has released a detailed proposal for international corporate tax reform. The main components of the draft are as follows.

Introduces deemed repatriation:

The international discussion draft proposes to tax all previously untaxed foreign income, i.e. deferred income, of U.S. multinational corporations (MNC) at 20 percent. This would affect roughly $2 trillion in accumulated foreign earnings, and is expected to net about $200 billion in tax revenue, after foreign tax credits are applied.

Eliminates deferral, partially exempts foreign income and taxes the remaining foreign income currently according to the following two options:

Option Y: A 20 percent exemption of active foreign income if that income is subject to a tax rate of less than 80 percent of the standard U.S. corporate tax rate (currently 35 percent). Active foreign income taxed above 80 percent of the standard U.S. corporate tax rate receives a 100 percent exemption. Foreign tax credits apply. This amounts to a worldwide minimum tax of 80 percent of the U.S. corporate tax rate, counting both foreign and U.S. federal corporate taxes.

If the U.S. corporate tax rate remains 35 percent, than the minimum tax on active foreign income would be 28 percent. If tax reform reduces the U.S. corporate tax rate to 25 percent, than the minimum tax on active foreign income would be 20 percent. Under current law, active foreign income is subject to the full 35 percent tax rate, but, critically, U.S. companies are allowed to defer indefinitely U.S. taxes while their foreign income remains actively invested abroad.

Option Z: A 40 percent exemption of active foreign income, with some redefinitions of active foreign income. It is unclear if these redefinitions are more or less broad than the current definitions. Foreign tax credits apply. Because of foreign tax credits, this too amounts to a minimum tax on worldwide income.

If the U.S. corporate tax rate remains 35 percent, than the minimum tax on active foreign income would be 21 percent. If tax reform reduces the U.S. corporate tax rate to 25 percent, than the minimum tax on active foreign income would be 15 percent.

Anti-base erosion and profit shifting provisions:

The discussion draft includes more than a dozen provisions aimed at making it more difficult for companies to shift profits abroad for tax purposes. The provisions include elimination of the “check the box” rule that allows U.S. parents to determine the business form of its foreign subsidiaries. Other provisions include limits on intangible property transfers, interest deductibility, and foreign tax credits.