Business Groups Pan Baucus Changes as Anti-Competitive: Taxes – Businessweek

Business groups lined up to
criticize Senate Finance Chairman Max Baucus’s international tax
proposal within hours of its release, slowing the momentum he
sought to build for the plan.

Baucus released a draft bill yesterday that would lower the
corporate tax rate by an unspecified amount, end a rule that has
encouraged companies to accumulate about $2 trillion in earnings
in their foreign subsidiaries and impose a 20 percent tax on
those stockpiled profits.

The Finance panel chairman, who has been criticized by
fellow Democrats for being too friendly to business, is
encountering opposition from some of the multinational
corporations he has courted. Coalitions backed by companies
including General Electric Co. (GE:US), Cisco Systems Inc. (CSCO:US) and
Caterpillar Inc. (CAT:US) said the plan would hurt U.S. companies’
ability to compete in overseas markets.

“They increase complexity and move our antiquated tax
system even further from international norms,” Bruce Josten,
the top lobbyist at the U.S. Chamber of Commerce, said of
Baucus’s ideas in a statement.

The chamber, the country’s largest business lobbying group,
was joined yesterday by the Business Roundtable, the National
Association of Manufacturers, the Alliance for Competitive
Taxation, the Let’s Invest for Tomorrow America Coalition and
the National Foreign Trade Council, which each issued statements
criticizing the tax proposal.

The trade council, whose board of directors includes
Microsoft Corp. (MSFT:US) and United Technologies Corp. (UTX:US), said it was
“disappointed” in Baucus’s plan.

‘Penalize Multinationals’

“This draft appears to penalize multinationals and will
make it more difficult for companies to compete globally,”
Catherine Schultz, the group’s vice president for tax policy,
said in a statement.

Baucus, of Montana, who plans to release drafts on other
tax topics today and tomorrow, wants to make the biggest tax
code changes since 1986 before he leaves Congress at the end of
2014. He and his House Republican counterpart, Dave Camp of
Michigan, have been stymied by the partisan divide over whether
the government should collect more revenue.

“I’m just trying to make something happen by taking the
initiative,” Baucus said yesterday. “Tax reform has more
political potency than a lot of people at first believe.”

Technically Complex

The international tax system is one of the most technically
complex areas of the U.S. tax code and potential changes are
being watched closely by companies that have significant global
businesses, including Pfizer Inc., Apple Inc. and The Procter &
Gamble Co. (PG:US)

For more than two years, many companies have been lobbying
Congress for a system that would lessen the tax burden on U.S.
companies’ overseas income. They make the argument that most
other industrialized countries don’t require their companies to
pay home-country taxes on foreign income.

Baucus’s plan would make it harder for companies to shift
profits from the U.S. and require a type of minimum tax that
would limit the benefit of earning income in low-tax countries.

Some of the criticism stems from the plan’s vagueness on
the corporate tax rate. Unlike Camp’s proposal, which favors a
25 percent rate without specifying how he would offset the
budgetary cost, Baucus has said only that he hopes to get the
rate below 30 percent, down from 35 percent now. Corporations
would find the changes more palatable with a lower rate.

Groups aligned with labor unions, such as Americans for Tax
Fairness and Citizens for Tax Justice, said yesterday that
Baucus’s plan doesn’t go far enough because he’s insisting that
corporate tax changes should be revenue-neutral instead of
raising the taxes companies pay.

Lew’s Support

Baucus garnered supportive or neutral statements from
Treasury Secretary Jacob J. Lew and at least four members of his
committee — Democrats Ron Wyden of Oregon, Sherrod Brown of
Ohio and Jay Rockefeller of West Virginia, along with Republican
Rob Portman of Ohio.

Baucus’s plan would make it tougher for companies to claim
that profits are earned in low-tax countries, said Ed Kleinbard,
a tax-law professor at the University of Southern California.

Under the Baucus plan, technology and pharmaceutical
companies would no longer be able to pay single-digit effective
tax rates on their foreign income, he said.

‘Income Strategies’

“The package reduces the opportunities for large-scale
stateless income strategies both by U.S. multinationals and by
foreign multinationals doing business in the United States,”
said Kleinbard, a former chief of staff of the congressional
Joint Committee on Taxation.

Under current law, U.S. companies owe taxes at the federal
rate of 35 percent on all income they earn around the world.
They receive tax credits for payments to foreign governments and
can defer U.S. taxation until they repatriate the money.

That system has encouraged companies to accumulate untaxed
earnings in foreign subsidiaries. It also creates incentives for
companies to move intellectual property out of the U.S. and into
low-tax jurisdictions.

Many other countries, including the U.K. and Japan, have
shifted to what’s known as a territorial system in which
companies owe little or no taxes on their foreign income. In the
opposite direction, industrialized countries have been moving to
prevent companies from using accounting maneuvers to shift
income outside their borders.

The Baucus plan is “a cautious, modest step in the
direction of territorial taxation,” said Alan Viard, a resident
scholar at the American Enterprise Institute, a research group
in Washington that advocates for small government.

Hybrid System

Baucus, in suggesting a hybrid between current law and a
territorial system, is proposing two options for his minimum
tax. The first would tax all income from foreign sales and
services immediately at a rate equal to 80 percent of the new
U.S. rate.

Baucus has said he wants a new tax rate of less than 30
percent. If it were set at 28 percent, for example, the minimum
tax would be set at 22.4 percent.

That rate would apply to a company’s earnings in each
jurisdiction, so that companies operating in high-tax areas
would owe no incremental U.S. tax on their foreign earnings. A
company operating in Ireland, by contrast, would effectively
have to pay the U.S. the difference between the Irish tax rate
of 12.5 percent and 22.4 percent.

The second option would set a lower minimum tax rate, 60
percent of the U.S. rate, while narrowing the definition of
income eligible to only income from active business operations.
Other income would be taxed at the full U.S. rate immediately.

Accumulated Earnings

The earnings that companies have accumulated under the
current system would be taxed at 20 percent over eight years,
regardless of whether companies have the money in liquid form
and regardless of whether they bring it back to the U.S.

That tax would generate more than $200 billion, and Baucus
hasn’t decided what to do with the revenue. Some could be used
to ease the transition to the new system. Some could be used, as
President Barack Obama has suggested, for infrastructure.

Baucus is seeking comments from companies and senators by
Jan. 17.

Senator Orrin Hatch of Utah, the top Republican on the
Finance Committee, said he disagreed with Baucus’s decision to
release the drafts while Democrats are proposing tax increases
in a budget conference committee.

Today’s draft is expected to address tax administration
issues, including tax filing and identity theft. Tomorrow’s
proposal is expected to focus on capital-cost recovery and
depreciation rules.

To contact the reporter on this story:
Richard Rubin in Washington at
rrubin12@bloomberg.net

To contact the editor responsible for this story:
Jodi Schneider at
jschneider50@bloomberg.net