Summary
Once again, a proposal to reform how a U.S. based multinational company's foreign earnings are taxed has failed to gain congressional support. Similar proposals introduced over the past twenty years have consistently failed to gain traction. The current proposal was part of the Obama administration's fiscal year 2010 budget which made reference to additional tax revenues in excess of $200 billion related to the reform of corporate taxation on foreign earnings.
Analysis
For almost twenty years now, legislative reform proposals have been introduced to redefine how and when U.S. based multinational company's foreign earnings are taxed in the U.S. President Obama's fiscal year 2010 budget contained a line item "Implement international enforcement, reform deferral, and other tax reform policies". The tax revenues associated with this line item was $210 billion. Initially, this was interpreted to mean that the administration would pursue a total repeal of the deferral of U.S. taxation on certain foreign earnings of a U.S. based company. Currently, a U.S. based multinational company is generally not taxed on its foreign earnings until the earnings are repatriated (actual or deemed) by its foreign subsidiary. The U.S. company is generally entitled to a foreign tax credit against its U.S. tax equal to the foreign tax that was paid on those same earnings (typically, substantially less than the U.S. tax at 35%). Subsequent to the release of the budget, it became clear that there wasn't sufficient congressional support for a total repeal of the foreign earnings tax deferral. As a result, other alternatives short of total repeal were discussed (e.g., deferral of certain currently tax deductible expenditures until earnings repatriation, revision of certain "check the box" regulations). It now appears that there isn't even sufficient support for these watered down proposals. The reservations relate to the potential impact any reforms could have on a U.S. company's ability to compete with its foreign based competitors (those competitors having lower tax burdens in their resident country). Therefore, it appears that any reform of the foreign earnings tax deferral is on hold for at least a couple of years. Given the resistance that these proposals have faced for the past twenty years, it remains uncertain as to whether these reforms will ever gain traction.
Thomas Klein consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
