Factbox: What are US foreign profit tax reform options?

Thu Oct 27, 2011 10:54am EDT

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(Reuters) - Republican Representative Dave Camp, the chairman of the tax-writing House of Representatives Ways and Means Committee, on Wednesday proposed a "territorial system" for taxing overseas profits of U.S. corporations.

As the tax reform debate intensifies on Capitol Hill, opponents say alternatives should be considered, as well.

One would be repealing a law that lets companies defer payment of taxes on foreign profits, making the profits subject to immediate taxation just like U.S. domestic profits.

Here is a look at the present law on taxing international profits and some reform proposals, based on interviews and two nonpartisan research reports.

One report is from the Congressional Research Service. (See here).

The other is from the Joint Committee on Taxation. (See here)

PRESENT LAW

The top corporate income tax rate is 35 percent. Profits earned in the United States are taxed at that rate on a current basis, meaning right away.

But most foreign profits are not taxed on a current basis. Instead corporations can put off paying taxes on these profits, and many do, using the overseas income tax deferral law.

As a result, an estimated $1.2 trillion to $1.5 trillion in corporate profits have been parked overseas avoiding taxation, mostly by large technology and pharmaceutical companies.

Corporations must pay taxes to the host country where the profits are earned or booked, but not to the United States as long as the profits stay abroad.

Large multinational companies tend to favor replacing the present system with a territorial system, while critics say it would be simpler just to end income deferral.

REPEAL OF DEFERRAL

Ending deferral would subject all active corporate profits -- at home and abroad -- to current basis taxation at the full rate of 35 percent, minus credits for foreign taxes paid and other tax breaks.

This would wreck corporate tax-dodging strategies and bring an estimated $10 billion to $30 billion in added tax revenue to government.

PARTIAL REPEAL OF DEFERRAL

One way to repeal deferral could be to roll it back only for tax haven countries targeted by the government. Choosing which countries to target in this way would be a process fraught with politics.

Another way might be to end deferral for countries with tax rates that are too far below the U.S. rate.

A third approach might be to end deferral for profits made in the production of goods that are then imported into the United States. Tracing their origins would be complicated.

TERRITORIAL SYSTEM

This would exempt most or all active overseas profits from taxes. Camp's plan would exempt 95 percent of overseas profits from taxes.

Similar proposals have been made in the past, including one put forward in 2005 by a presidential tax reform panel assembled by the George W. Bush administration.

Many countries have a territorial system, but most limit the amount and types of foreign profit exempted from taxation.

Critics of the territorial system say it would give U.S. corporations another incentive to move income and jobs offshore. Backers say this problem could be addressed by lowering the corporate income tax rate to a level closer to other countries' rates and by making other adjustments.

(Reporting by Kevin Drawbaugh, editing by Matthew Lewis)

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