Focus on International Tax ReformFebruary 23, 2016
Bipartisan support for updating U.S. international tax laws continues to grow in response to concerns over the loss of U.S.-headquartered companies as a result of cross-border mergers and acquisitions. Building on this momentum, House Ways and Means Committee Chairman Kevin Brady (R-Texas) intends for the taxwriting body to focus on international tax reform as their first priority this year. While he has given no specific timeline for a committee vote on a bill, he has tasked Tax Policy Subcommittee Chairman Charles Boustany (R-La.) with the responsibility of drafting the legislation. Rep. Boustany is aiming to have a draft completed before the House adjourns for its summer recess on July 15, ahead of the Republican National Convention.
Rep. Boustany worked with committee-member Richard Neal (D-Mass.) last summer and introduced an “innovation box” proposal intended to be one component of a broader international reform package. At that time, Reps. Boustany and Neal solicited feedback on their initial draft, and an updated version is expected to be included in the legislation introduced this year. Their discussion draft proposal called for a U.S. innovation box that would provide corporations an effective tax rate of roughly 10 percent on certain income generated from patents and a broad range of other intellectual property. The reduced rate under the proposed Boustany-Neal innovation box would be achieved through a corporate deduction for profits derived from certain intellectual property. Specifically, the deduction would be equal to 71 percent of the lesser of the taxpayer’s “innovation box profit” or its taxable income (determined without the innovation deduction) for the taxable year.
Other elements of an international tax bill are anticipated to include the transition from a worldwide to a territorial system for taxing foreign-source income of U.S. multinationals, a “deemed repatriation” provision that would impose a tax lower than the U.S. corporate rate on profits currently held overseas, and safeguards against base erosion.
For his part, Senate Finance Committee Chairman Orrin Hatch (R-Utah) is aware of Rep. Brady’s intentions, and the two lawmakers plan to meet weekly to discuss the issue. A July 2015 Senate Finance Committee international tax working group report called attention to the increased use of ‘patent box’ regimes by other countries and expressed support for a U.S. innovation box to counter efforts by other countries to attract highly mobile corporate income. For now, Sen. Hatch is currently working to develop a bill addressing corporate integration, which is expected to give corporations a deduction for dividends paid out to shareholders and revise the tax treatment of dividends shareholders receive.
While election-year politics will dominate legislative action this year, comprehensive tax reform remains a top priority for NSBA and our small businesses. NSBA supports a broad overhaul of the tax system by dramatically broadening the base—cutting the breaks that litter the tax code—and lowering rates. NSBA believes it is imperative that the U.S. moves towards a simpler, fairer tax system that does not attempt to only tweak one piece of the puzzle, such as international-only tax reform, and instead incorporates NSBA’s nine principles for tax reform.