Baucus Corporate Tax Proposal Takes Aim at Merger ‘Inversions’

There’s lots for big companies to like about a proposed overhaul of the corporate tax code, put forward on Tuesday by Senator Max Baucus, Democrat of Montana.

As Jonathan Weisman of The New York Times wrote from Washington, the draft legislation “would permanently exempt much of the profits earned by American corporate subsidiaries in foreign countries” and “establish a temporary 20 percent tax rate on billions of dollars in corporate earnings that have been parked abroad.”

Though the bill would also tax the profits from foreign subsidiaries selling into the American market, and would still tax overseas cash when it is brought back to the U.S., the overall effect would be to simplify the corporate tax code and create incentives for multinationals to keep more of their business onshore.

There is reason to think Mr. Baucus may find ample support for his plan. As The Times wrote, “There is broad bipartisan consensus in Washington that the corporate tax code is hopelessly outdated and overly complex, with a 35 percent tax rate that is now the highest in the developed world.”

But some companies may not be so enamored with Mr. Baucus’s proposal. Technology and pharmaceutical companies that have hoarded cash overseas will still be hit disproportionately hard if they do repatriate cash.

And companies considering more systemic fixes to their high tax rates will also be discouraged, as the Baucus proposal aims to clamp down on so-called “inversions.”

Inversions, which occur when a U.S. company reincorporates abroad, have picked up lately as highly-taxed multinationals seek relief in low-tax jurisdictions like Ireland and the Netherlands. In a press release, Mr. Baucus said one of the goals of the proposed bill is to “reduce incentives for U.S.-based businesses to move abroad, whether by reincorporating abroad or merging with a foreign business.”

Mr. Baucus has become a vocal critic of inversions, speaking out on them recently, after DealBook published an article documenting their increasing popularity.

Though the draft legislation doesn’t specifically propose new rules for how companies could invert, it includes a number of provisions that would make them less attractive. Simply lowering the statutory tax rate of 35 percent would be one big step. A new effective rate below 30 percent, which is the goal of the new plan, would make a big difference to many companies with billions of dollars in profits.

Inverted companies also avoid U.S. taxes because they are able to use overseas cash more freely, without being taxed when bringing back to the U.S. By introducing a limited tax holiday for overseas cash trapped overseas, Mr. Baucus’ plan would go a ways towards curbing the appeal of this move.

A final way corporations save money once inverted is by using tax credits from losses in foreign subsidiaries to offset taxes on profits in the United States. The Baucus proposal would limit such activities.

Despite bipartisan support, Mr. Baucus’ proposal won’t be adopted overnight. Businesses and other senators have until Jan. 17 to submit comments on the draft legislation, and even then, many parties may look for changes to the corporate tax code to come as part of more comprehensive tax reform.

As The Times wrote, “what’s standing in the way is lawmakers’ insistence that any corporate tax overhaul must be part of a comprehensive plan that also simplifies the individual tax code and helps the half of businesses that file through the individual code.”