As the Trump administration and House and Senate leaders huddle to find a path to permanent tax reform, the detailed draft legislation released in 2014 by former Rep. Dave Camp will be among the ideas considered.
Relative to the Blueprint, the Camp proposal takes a traditional approach to tax reform, with a focus on broadening the tax base to achieve lower tax rates. We will consider various elements of the Camp plan and begin today with a recap of certain of its international components.
Territoriality. In a significant move toward a territorial system, U.S. corporations that receive dividends from 10%-owned non-U.S. corporate subsidiaries would be eligible for a 95% deduction of the amount of such dividends. Excluded dividends would reduce the distributee’s basis in the shares of the distributing corporation for purposes of determining losses (but not gains) on the disposition of the distributing corporation’s shares.
Transition Tax. The Camp proposal would impose a one-time transition tax on 10% U.S. shareholders of a non-U.S. corporation in the amount of their pro rata share of previously untaxed current and accumulated earnings and profits (E&P) of the non-U.S. corporation. Under the plan, E&P would be split into (i) cash and short-term assets, which would be subject to tax at an effective rate of 8.75% and (ii) amounts reinvested in non-U.S. operations, which would be subject to tax at an effect rate of 3.5%. Foreign tax credits would be partially available to offset the transition tax. Taxpayers would have eight years to pay the transition tax pursuant to a back-loaded schedule with no interest charges.
Foreign Base Company Intangible Income. The proposal would create a broad new category of subpart F income for “intangible income,” generally defined as adjusted gross income in excess of a 10% return on invested business assets, i.e., it is not limited by reference to intangibles. The regime would apply only to such income taxed at a foreign effective rate below 15%.
Interest Expense Deductions. A U.S. corporation that is part of a worldwide affiliated group with “excess domestic indebtedness” would be denied a portion of its interest expense deductions. Otherwise deductible interest would be reduced by the lesser of amounts determined under two frameworks: (i) the leverage of U.S. members of the affiliated group would be compared with the leverage of the entire group, with the limitation applying to the extent the domestic leverage exceeds 110% of the global leverage; and (ii) the net interest expense of a U.S. corporation would be limited to 40% of its adjusted taxable income. Conforming changes would be made to the earnings stripping rules of Section 163(j).
CFC Look-Through. The CFC look-through rule of Section 954(c)(6) would be made permanent.