Large Companies Oppose Idea for Taxing Foreign Profits

Congressional Republicans are trying to write new rules for taxing foreign profits of U.S. corporations, and a group of large, influential companies is warning against one prominent option.

Under current law, companies owe the full 35% corporate-tax rate on their world-wide earnings and have to pay it on any profits they bring back to the U.S. That system encourages companies to book profits overseas and leave them there. The issue is often a flashpoint in debates over changing the tax code.

Republicans want to lower the corporate-tax rate and let companies bring future global profits home without paying U.S. taxes on top of foreign taxes. They are searching for a way to do that without giving companies an incentive to move more operations and profits to countries with far lower taxes.

One alternative Republicans are considering is a minimum tax on those profits. But such a tax would have "unintended and adverse consequences, " the business group, which includes companies such as Eli Lilly & Co., United Technologies Corp. and United Parcel Service Inc., told top lawmakers this month in a previously undisclosed policy paper.

The comments by the Alliance for Competitive Taxation are an early sign of the competing pressures lawmakers will face as they seek to overhaul the U.S. tax code.

As part of that overhaul, Republicans want to exempt foreign corporate income from U.S. taxes to a large extent. Other countries, including the U.K., have shifted to similar systems in recent years and Republicans want to follow that trend. The 35% rate would come down and the minimum rate would be set below the new U.S. corporate tax rate. Republicans may also be considering other rules beyond a minimum tax, and they haven't made any final decisions.

A minimum tax would act as a "safety net" against companies trying to pay little or no tax on some foreign income, said Ed Kleinbard, a tax law professor at the University of Southern California. "The United States does not encourage competitiveness when it simply subsidizes international tax avoidance," he said.

But the alliance argues that a minimum tax would focus too much on U.S.-based companies and that the rules wouldn't match other how other major countries treat their home companies. A minimum tax, the alliance contends, would give foreign-based firms an advantage.

"We would continue to have a tax code that is out of step with the rest of the world," said David Lewis, vice president, global taxes, at drugmaker Eli Lilly. "Let's get it done right and not settle for anything less. And right means U.S. companies can compete, thrive and win in the global marketplace."

Under the current system, U.S. companies get tax credits for payments to foreign governments and only pay the difference between lower foreign rates and the U.S. rate if they repatriate profits.

The system encourages U.S. companies to book profits abroad and leave them there.

They can often pay the same tax rates outside the U.S. as their foreign competitors do, but they can't move cash freely around the world or distribute it to shareholders without triggering the need to pay U.S. taxes. To companies, that is a significant problem and it drives their dissatisfaction with the current system.

Lilly, for example, had an 18.9% tax rate in 2016 and a 13.7% rate in 2015, driven largely by lower foreign tax rates. The company now has $28 billion in stockpiled profits that haven't faced U.S. taxes.

Eliminating the tax on foreign profits would allow U.S. companies to bring future foreign profits home without paying U.S. taxes. But that kind of system would give companies a bigger incentive to shift profits abroad because they could reap the benefits of lower foreign tax rates. Lower U.S. corporate-tax rates would reduce that incentive, but wouldn't remove it.

"You still need to have meaningful rules that define the income earned in your jurisdiction," said Tom Neubig, a former official and corporate-tax specialist at the Treasury Department and the Organization for Economic Cooperation and Development.

The countries that use tax systems Republicans want to emulate allow their home companies to bring back cash with little or no tax. They use a variety of rules to prevent companies from seeking to pay less tax by moving operations or profits abroad, but generally don't have minimum taxes on active foreign profits.

Minimum taxes have been floated in recent years by former president Barack Obama and former House Ways and Means Committee Chairman Dave Camp (R., Mich.).

The original House GOP plan to address foreign profits and prevent erosion of the U.S. corporate-tax base was border adjustment, which would have based taxes on the location of a company's consumers, not its headquarters or profit centers. But that idea collapsed and Republicans are looking for an alternative.

Corporate executives say they want a system that doesn't put their companies at a disadvantage.

"It's got to be fair. It's got to be competitive. And it's got to recognize that you've got to protect the U.S. base," said Greg Hayes, the chief executive officer of United Technologies.

David Abney, the CEO of UPS, said last week that changing the system that encourages companies to keep profits abroad and lowering the tax rate would, in combination, be the single most important thing policy makers could do to improve American competitiveness.

The basic architecture of the GOP plans calls for lowering tax rates and removing tax breaks, which would raise taxes on low-tax industries such as pharmaceuticals and lower them for higher-taxed retailers.

But that is not the relevant comparison, said Mr. Lewis, who said he's trying to keep up with Novartis AG of Switzerland and U.K.-based GlaxoSmithKline PLC -- not domestic retailers.

"The most important consideration is how you stack up against your foreign competition," he said.

Satisfying high-rate domestic companies and low-rate multinationals -- whose complaints both animate the GOP drive for major tax code changes -- is one of the challenges facing lawmakers.

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

August 27, 2017 08:14 ET (12:14 GMT)