The U.S. Chamber of Commerce raised concerns about an international tax draft proposed by House Ways and Means Committee Chairman Dave Camp, listing several ways it says the plan could hurt U.S.-based companies.
Camp’s proposal, released Oct. 26, recommends moving to a territorial system that would exempt from taxation the overseas profits of U.S.-based companies. In concept, it is the kind of system that the Chamber and other business groups have sought.
“It is imperative to shift to a territorial tax system but that system must not be overly onerous to companies seeking to grow, compete and innovate,” the Chamber, the nation’s largest business group, wrote in comments submitted in conjunction with a Ways and Means hearing today.
The Chamber was responding to Camp’s call for opinions from businesses and tax practitioners. Its comments demonstrate some of the challenges that the Michigan Republican will face as he tries to respond to multinational corporations’ call for a more favorable tax system without reducing revenue.
Under current law, U.S.-based companies are taxed at a top rate of 35 percent on income earned around the world. They are eligible for foreign tax credits for payments to other countries and defer U.S. taxation until they bring the money home.
Most other major countries, including Japan and the U.K., employ a territorial system in which overseas earnings are exempt from domestic taxation. U.S. companies say they have difficulty competing against companies based elsewhere.
Camp’s proposal would exempt 95 percent of foreign profits from active business operations. It would require U.S.-based companies to pay 5.25 percent tax on their accumulated foreign earnings, which now total more than $1 trillion.
In his proposal, Camp included three options aimed at limiting erosion of the U.S. tax base. Companies could, for example, move operations or profits to low-tax foreign jurisdictions, a shift that would be easier for companies in the pharmaceutical and technology industries, which generate profits from intellectual property.
The Chamber’s comments challenge these fundamental pieces of Camp’s draft proposal. The tax on accumulated offshore earnings perhaps shouldn’t apply to hard assets such as factories and equipment, the group wrote.
The chamber also wrote that Congress should consider providing a full 100 percent exemption for income from foreign branches, which are different from subsidiaries. Banks often use a branch structure.
“The chairman believes that gathering feedback from academics, practitioners and employers is critical to developing a plan that results in greater investment and hiring here at home,” said Michelle Dimarob, a Camp spokeswoman, in a statement. “We value the feedback and will consider the organization’s suggestions along with those from others across the stakeholder community.”
The Chamber also criticized the measures designed to protect the domestic tax base, saying in the statement that it “questions the need for any of these alternatives, since other countries that have switched” to territorial systems don’t appear to have seen erosion in their tax base.
David Noren, a lawyer who specializes in international tax planning and who testified at today’s hearing, also said he was concerned about the potential effects of the anti-base-erosion provisions.
“The one thing that could push us outside of international norms would be if we got too aggressive in pushing base erosion and interfering with common business models,” said Noren, a partner at McDermott Will & Emery LLP in Washington.
Representative Richard Neal of Massachusetts, a Democrat who criticized other aspects of Camp’s plan, said limits on income-shifting were necessary.
“I am pleased to see that Chairman Camp’s proposal included approaches for preventing erosion of the U.S. corporate tax base, which is a critical concern as we move forward with this type of international tax reform,” Neal said at the hearing.
The Chamber also questioned several pieces of the proposal that it said would hurt U.S.-based companies that aren’t organized as corporations.