Submission to Hearing on Ways and Means International Tax Reform Discussion Draft

Abstract

The House Ways & Means Committee Discussion Draft proposes a territorial system for the United States. This document is the author's comments as submitted to the Committee in conjunction with a hearing held on 17 November 2011.The draft importantly includes a dividend-received deduction of 95% instead of 100% as a mechanism to disallow expenses that are attributable to exempt foreign earnings. This mechanism causes the receipt of a dividend to be a event. The Draft also proposes elimination of the section 956 investment in U.S. property rules. This elimination along with a dividend being a taxable event will continue the current encouragement of U.S. MNCs to stockpile earnings overseas in tax havens and will encourage intercompany loans of such funds that will further reduce the US tax base from the interest charged. Changes are suggested that will eliminate these detrimental effects.Comments and suggested changes are also proposed for a number of other matters within the Discussion Draft.The submission includes discussion under the following headings:1. New §965 – Adjustment Needed to Avoid Rewarding Tax Structured Vehicles2. New §245A and §956 – Dividend-Received Deduction Structure and Erosion of US Domestic Tax Base – A Flawed Mechanism Requiring Change3. New §245A – Effect of Subpart F §954(b)(3)(A) De Minimis Rule – Need to Amend to Reflect Territorial System or Eliminate Completely4. New §245A(b)(2)(A) – Treatment of Foreign Branches5. New §245A(b)(2)(B) – Foreign Branch Defined6. New §245A and §246(c)(5) – Effect of Becoming a CFC7. New §1247 – Issues Concerning Sales and Exchanges8. New §245A – Noncontrolled 10/50 Corporations – Foreign Tax Credit9. New §904(b)(3) – Indirectly Allocable Expenses – Erosion of Domestic Tax Base10. Deletion of §904(d) – Separate “Baskets”11. §909 – Repeal12. §§959 and 961 – Elimination13. §1248 – Continued Application14. §960 – Effect of Elimination of §90215. Option A – New category of subpart F income for intangibles16. Option B – New Low-Taxed Cross-Border Foreign Income17. Option C – New Foreign Intangible Income18. Which of the Three Options Should Be Used?