NSBA Weighs in on International Tax Reform Proposal

November 15, 2011

NSBA submitted comments to the Ways & Means Committee on the international tax reform Discussion Draft released on Oct. 26, 2011.  The U.S. has the second highest corporate tax rate in the developed world.  Reducing the corporate tax rate would be, all other things being equal, economically constructive. The Discussion Draft would drop that tax rate to 25 percent and move to a form of territorial tax system where most foreign source income would be taxed at a 1.25 percent tax rate. The Discussion Draft does not address how these changes would be financed.

NSBA noted that most small businesses are pass-through entities (such as S corporations, partnerships or LLCs) and the corporate tax rate is not a major concern. NSBA raised serious concerns about how the Discussion Draft may be financed. Specifically, NSBA cautioned that financing the corporate tax rate reduction and the move to a territorial tax system should not be financed by repealing adequate capital cost recovery allowances, small-business expensing and LIFO inventory accounting. Repealing these provisions would dramatically raise taxes on small businesses yet they would not generally benefit from the corporate tax rate reduction. Moreover, such a move would raise the cost of capital throughout the economy.

NSBA also cautioned that unless the move to a territorial system is accompanied by strong intercompany pricing rules, strong rules governing intangible property and strong interest expense allocation rules, paying taxes would become genuinely optional for multinational corporations.

NSBA noted that there are much simpler ways to move to a territorial system than the method adopted by the Discussion Draft. One such way would be the Fair Tax. Moreover, the Fair Tax, unlike the income tax, would for the first time impose a tax on foreign goods sold in the U.S. If the income tax is to be retained, a system that eliminates the current system of deferral and foreign tax credits and simply does not tax foreign source income would be a much simpler approach than that adopted by the Discussion Draft.

For a copy of the NSBA comments on the Ways & Means Discussion Draft, click here.

For more information on the Discussion Draft, click here.