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Baucus US tax reform proposal: A warning for Apple and Google

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After the release of Senate Finance Committee chairman Max Baucus’ discussion draft outlining his proposals for US corporate tax reform, Jim Ditkoff, senior vice president – finance and tax – at science and technology company Danaher Corporation, analyses the proposals and explains why companies like Apple and Google may regret some of their lobbying efforts.

Ditkoff immediately draws comparison between the Baucus discussion draft and previous proposals made by Dave Camp, chairman of the House Ways & Means Committee.

“I think it’s interesting, and perhaps inevitable, that the Republican proposal that is now being championed by Baucus (Montana Democrat) is the proposal of Ways & Means chairman Camp (Michigan Republican) to tax all of the pre-enactment earnings and profits of foreign subsidiaries of US corporations at a reduced US tax rate,” said Ditkoff.

However, Baucus is seeking to not only impose the retroactive tax (the discussion draft is vague here, saying this would be at a reduced rate of “for example, 20%, payable over eight years”) but also wants to currently tax most of the future income of foreign subsidiaries of US corporations, whether that income is active or passive and whether or not that income is repatriated.

“Specifically, Baucus offers the choice of a US tax on 80% of all foreign earnings or on 60% of active foreign earnings and 100% of other foreign profits,” said Ditkoff.

But the Senate Finance Committee chairman does have one proposal that Ditkoff likes.

“That is his proposal to tax the income of foreign subsidiaries from selling products or providing services to US customers at full US tax rates. This is obviously not good tax policy,” he said. “It means that foreign companies without a US parent will have a tremendous advantage in selling products and providing services to US customers.”

On top of that, Ditkoff believes the proposal would not encourage US multinationals to move their tax haven foreign manufacturing operations back to the US, saying there are plenty of non-tax reasons to manufacture in Singapore or China, rather than California.

What he likes about the proposal is that it targets companies such as Apple and Google that have been arguing the loudest for a territorial tax system.

“They wanted to continue manufacturing the products they sell to US customers in foreign tax havens and then to bring those low-taxed profits back to the US tax-free to finance buy-backs – nobody is even pretending anymore that these companies were going to use those funds to create jobs in the US,” said Ditkoff. “Now Baucus is saying that they won’t need to pay US taxes on the repatriation of those foreign manufacturing profits, because they will be subject to full US taxes the moment they are earned. Be careful what you wish for.”

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