On October 26, 2011, House Ways and Means Committee Chairman Dave Camp released for public comment a discussion draft on revenue-neutral corporate tax reform that lowers the top corporate tax rate to 25% and adopts a territorial tax system, generally effective for tax years beginning after 2012. Chairman Camp told reporters that the goal of tax reform is to remove penalties for companies that want to invest in the United States and make the United State more competitive in relation to the rest of the world, where corporate rates are lower and territorial tax systems are the norm.
Key elements of the Ways and Means discussion draft are as follows:
- A 95% dividends received deduction would be provided for eligible foreign-source dividends from a CFC, if the stock of the CFC has been held for one year or longer by a 10% US corporate shareholder receiving the dividend. The proposal also extends the 95% exemption to foreign branches by treating them as CFCs.
- Pre-enactment earnings and profi ts (E&P) of foreign companies that has not previously been taxed would be included in income of a 10% or greater US shareholder as of the last tax year ending before January 1, 2013. A taxpayer could elect to spread the tax owed over a period of up to eight years with an interest charge. A dividends received deduction, tentatively set at an 85% rate, would be allowed, and credits for a corresponding portion of indirect foreign taxes would be allowed.
- The proposal would not narrow the current subpart F income categories. The proposal would eliminate for all shareholders the exemption for previously taxed income, the indirect foreign tax credits, the antisplitter foreign tax credit rule, and the earnings invested in US property (§956) rule. The proposal would simplify the foreign tax credit rules by combining all foreign tax limitation categories and eliminating the allocation of indirect expenses.
- Three alternative options were provided to mitigate concerns that there would be an increase in base erosion under a territorial system:
- “Excess Returns” proposal (see following discussion)
- Income of a CFC taxed at a foreign rate of 10% or less would be considered subpart F income
- A new category of subpart F income from the sales of goods or services attributable to IP without regard to where the IP is developed or exploited
- The discussion draft includes a provision to limit deductions for net interest expense of US shareholders that are members of a worldwide affi liated group with excess domestic indebtedness. Generally, if a US corporate shareholder owns at least 10% of the voting shares of a foreign corporation, the proposal would disallow a portion of net interest expense if the US corporation is overleveraged compared to the worldwide group or if the US corporation’s net interest expense exceeds an unspecifi ed percentage of adjusted taxable income. The lesser of the amounts determined under these tests is the amount by which deductible interest is reduced.