Tuesday, March 3, 2015

Recent Proposals on Taxing Offshore Earnings

Several recent proposals have been made for a one-time preferential corporate tax rate to encourage or, in some instances, force U.S. companies to pay tax on previously untaxed foreign income. These proposals may indicate that a legislative compromise among the proposals could be reached this year.

Under current law, U.S. multinational companies are subject to worldwide taxation but generally may receive credits for foreign taxes paid and may defer U.S. tax on active earnings of their foreign subsidiaries until these profits are paid as dividends to the U.S.

The recent proposals to tax offshore earnings include the following:

Proposed By
Operative Rules
President Barack Obama (D), as part of the Administration’s Fiscal Year 2016 Budget released on February 2, which has no legislative effect.
14% one-time mandatory tax, plus an annual 19% minimum tax
The one-time 14% tax would be on earnings accumulated by a controlled foreign corporation (CFC) and not previously subject to U.S. tax. A limited credit would be allowed for the amount of foreign taxes associated with the previously untaxed earnings, multiplied by 40% (i.e., the ratio of 14%, the one-time tax rate, to 35%, the maximum U.S. corporate tax rate for 2015). The 14% tax would be payable ratably over 5 years.
The 19% minimum tax would be on future earnings, reduced (but not below zero) by 85% of the per-country foreign effective tax rate (calculated by comparing foreign earnings with their associated foreign taxes over a 60-month period).  The 19% minimum tax base would also be reduced by an “allowance for corporate equity” (ACE). 
Reps. John Delaney (D-Md.) and Richard Hanna (R-Ny.), introduced legislation into the House of Representatives (H.R. 625) on January 30.
8.75% one-time mandatory tax
Generally, the “Subpart F” income of a CFC, which is subject to current taxation, would be increased by any post-1986 untaxed foreign income, and reduced by a 75% deduction for the amount so included, for an effective tax rate of 8.75% (25% taxable portion, multiplied by 35% corporate tax rate).*
No foreign tax credit would be allowed with respect to the deductible portion. The tax would be payable ratably over 8 years.
Sen. John McCain (R-Ariz.) and Rep. Trent Franks (R-Ariz.), introduced legislation into the Senate (S. 397) and the House of Representatives (H.R. 788), on February 5.
8.75% (or 5.25%, where applicable) one-time voluntary tax
A 75% deduction for dividends received from CFCs would be allowed, for an effective tax rate of 8.75% (25% taxable portion, multiplied by 35% corporate tax rate).*
No foreign tax credit would be allowed with respect to the deductible portion. A lower 5.25% rate would be available if the company expands payroll by 10% through net job creation or higher payroll. The legislation includes a penalty of $75,000 that generally would apply for every full-time position that is eliminated.
Sens. Rand Paul (R-Ky.) and Barbara Boxer (D-Calif.), as described in a “White Paper” released on their websites on January 29, but not yet introduced into the Senate.
6.5% one-time voluntary tax
According to the description in the White Paper, the special 6.5% rate generally would apply only to dividends of previously untaxed foreign income that exceed the company’s average dividends in recent years.
The tax would be payable ratably over 5 years. A portion of the income subject to the special rate must be used for increased hiring, wages and pensions, and research and development, and funds cannot be used for executive remuneration, shareholder dividends, or stock buybacks for three years after the program ends.

*This bill’s provisions operate by way of amendment to existing Section 965 of the Internal Revenue Code of 1986, as amended.