February 17, 2011 / 5:42 PM / in 7 years

UPDATE 2-Taxing offshore profit up for debate-US aide

* “Territorial” system will be part of debate - official

* Corporate reform can be done first - official

* Business income earned by individuals also a concern (Adds comments from Mundaca, GE’s Samuels)

By Kim Dixon

WASHINGTON, Feb 17 (Reuters) - The debate over overhauling the U.S. corporate tax system will have to include whether to cut taxes on profits earned abroad, a U.S. Treasury Department official said on Thursday.

Michael Mundaca, assistant Treasury secretary for tax policy, a White House point man on revamping the corporate tax code, also said that corporate tax reform could be done before individual tax reform.

His comments to corporate tax executives at a conference in Washington, D.C. are friendly to corporate America, which contends that it has been hobbled internationally by being saddled with the second-highest corporate tax rate in the world.

The White House is in talks with corporations and others to gather ideas for an overhaul of the U.S. tax system. Observers believe the process will take several years.

Treasury Secretary Timothy Geithner said earlier this week that the corporate tax rate needed to be cut substantially, with a goal in the high 20 percent range from the current 35 percent. He also said business tax breaks should be trimmed.

Mundaca said that moving to a ”territorial“ tax system had to be part of the discussion.”

The United States is alone among the Group of Eight most industrialized countries in collecting taxes on profits earned worldwide. Companies get foreign tax credits to avoid double taxation but businesses have complained that they are limited.

Most other countries impose levies only on income earned domestically under what is called a “territorial” system.

Mark Weinberger, a Treasury tax official in the Bush administration, said Mundaca’s comments should be heartening to U.S. corporations. “Clearly, they are hearing the business community and territorial is on the table,” he said.

INDIVIDUAL VS CORPORATE BUSINESS INCOME

Representative Dave Camp, Republican chairman of the tax-writing Ways and Means Committee in the U.S. House of Representatives, supports revamping corporate and individual tax law simultaneously, noting that a big slice of business income is earned by individuals.

    Companies from hedge funds to doctors’ practices and other small businesses are organized outside the corporate tax system as partnerships, sole proprietorships and entities known as S-corps. So, if the corporate rate were to be lowered, this group would still face the top individual tax rate, now 35 percent.

    Mundaca acknowledged the need to deal with this issue, saying, “Business income earned and taxed through the individual system may have to be part of this effort as well,” he said.

    Mundaca stressed that the goal was not to raise revenue from the business sector, but he said companies faced hard choices about prized tax preferences, such as accelerated depreciation, and whether they should be trimmed to offset a higher rate.

    Asked about how low the corporate tax rate could go, Mundaca said, “It depends on what people (companies) are willing to give up” in terms of tax breaks.

    Some business executives said they were not seeking special treatment while others decried what they called “rhetoric” from the administration about jobs shipped abroad.

    They all point to tax systems outside the United States to argue that the U.S. system is stifling their ability to compete with foreign peers.

    “U.S. tax policy cannot be set in a vacuum,” said John Samuels, vice president for tax for General Electric (GE.N).

    President Barack Obama recently tapped GE chief executive Jeff Immelt to head a panel on business competitiveness. (Reporting by Kim Dixon; editing by John Wallace)

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