The top Republican tax writer in Congress explained his plan tocreate a broad exemption for the profits that U.S.-basedcorporations earn outside the country, aiming to accelerate thedebate over international taxation.

The proposed territorial tax system outlined by RepresentativeDave Camp yesterday would overhaul the way the U.S. tax codeintersects with the global economy by adopting a system similar tothose in the U.K. and Japan. Companies including Procter &Gamble Co. and General Electric Co. are lobbying Congress for aterritorial system, and business groups praised Camp's plan.

“It's a good first step to bring the United States into a20th-century multinational tax system,” said Kenneth Kies, a taxlobbyist whose clients include Microsoft Corp. and Caterpillar Inc.“Realistically, this process is going to take a long time to reacha bill that some president will sign.”

Camp's proposal marks a noteworthy point in discussions aboutoverhauling the U.S. tax code, which most lawmakers and businessexecutives of varied political persuasions say is too complicated.The Michigan Republican, who took over the chairmanship of theHouse Ways and Means Committee in January, is shifting from holdinghearings to writing legislation.

He described today's proposal as the start of a comprehensiverewrite of the tax code and invited public discussion of theplan.

Reduced Corporate Rate

Camp wants to lower the U.S. corporate tax rate to 25 percentfrom 35 percent. His discussion draft doesn't include details onhow he plans to do that without increasing the federal budgetdeficit, and he didn't provide a timeline for filling in the blanksections on individual and business taxation.

“There's no real calendar prediction here,” said Camp, who alsoserves on the congressional supercommittee charged with finding atleast $1.2 trillion in deficit reduction.

Advancing broad tax legislation in this Congress would requireCamp to navigate a divided legislature in an election- yearclimate. The Obama administration has expressed interest in atax-code rewrite, though officials emphasize that they would wantit to raise more revenue than the current system does. In response,Republicans have stressed their opposition to tax increases.

Camp's plan would exempt 95 percent of U.S. profits earnedoverseas from taxation, ending a system that taxes U.S. companieson their worldwide income. The current system allows companies toclaim tax credits for payments to other governments and defertaxation until the profits are brought home. That approach hasencouraged companies to keep more than $1 trillion in profitsoutside the U.S.

One-Time Holiday

Google Inc., Apple Inc. and Qualcomm Inc. are part of acoalition urging a one-time tax holiday that would let them bringhome the accumulated profits at a low tax rate.

Camp's proposal would require those companies and others to paya 5.25 percent tax on accumulated overseas profits over eight yearsas part of a transition to a new system, whether they actuallybring the money back home.

Once companies paid that toll charge on the overseas profits,they could repatriate the money with the new 95 percentexemption.

Camp said the international portion of his plan would berevenue-neutral. The money from the so-called deemed repatriationwould offset the forgone revenue from the rest of the plan, atleast in the first decade.

In the long run, when those proceeds disappear, Camp's proposedsystem would cost the government revenue, said Edward Kleinbard, aprofessor at the University of Southern California.

'Arbitraging the Artifice'

“That's a one-time pickup, and yes, that can comply with a10-year window, but then you're just arbitraging the artifice ofthe congressional budget window,” said Kleinbard, the former chiefof staff of the congressional Joint Committee on Taxation.

Some Democrats said they worried that a territorial system wouldencourage companies to shift operations out of the U.S.

“While Halloween approaches, no matter how you dress up thisproposal, a territorial tax system is about shipping more jobs andprofits to someone else's territory,” said Representative LloydDoggett, a Texas Democrat, in a statement.

The effect of a territorial system depends greatly on thedetails, particularly on whether companies can deduct domesticexpenses related to producing untaxed foreign income.

Camp's 95 percent exemption approach forgoes detailed expenseallocation rules in favor of a “rough justice” approach, saidRosanne Altshuler, an economics professor at Rutgers University inNew Jersey.

Doggett and other Democrats say that companies' flexibility inkeeping their intellectual property outside the U.S. is eroding thedomestic tax base, even under the deferral system.

Preventing Income-Shifting

Camp's proposal includes three options for preventing suchincome shifting. One is a maximum 15 percent tax rate for foreignincome generated from royalties. That income would be taxed asdomestic income if it's earned in a low-tax country.

The second proposal would limit companies' ability to earnprofits in low-tax jurisdictions. Subsidiaries that book profits incountries with tax rates below 10 percent wouldn't qualify for theforeign-profit exemption unless the income was generated frombusiness operations in that country.

The third idea would adopt an approach favored by PresidentBarack Obama to tax “excess returns” from intangible propertylocated outside the U.S.

Kleinbard said he would make some of those options tougher.Still, he said, “It's important to acknowledge that Chairman Campand the drafters recognize that there are serious problems with aterritorial tax system with base erosion concerns.”

Camp also includes so-called “thin capitalization” rules toprevent companies from taking interest deductions against U.S.profits to support lightly taxed foreign operations. Companieswould see their interest deductions reduced if they areoverleveraged in the U.S. compared with the rest of the world andif their interest expense is too high relative to income, accordingto a summary of the bill.

Bloomberg News