Why Y? Reflections on the Baucus Proposal

Abstract

The international tax reform proposal introduced by Sen. Max Baucus (D-MT) on November 19, 2013 contains several significant innovations that promise to define the terms of the debate for the foreseeable political future. It is therefore worth examining in detail even if it seems unlikely that progress toward meaningful reform can be achieved very soon.The major component of the proposal is a move toward territoriality coupled with two alternative anti-profit shifting options, option Y and option Z. This article will argue that option Y represents a significant step forward and can be the basis of adopting a territorial regime, while option Z is deeply flawed and risks further profit shifting unconstrained by the current limits on repatriating profits. Other important innovations in the Baucus proposal include a new destination based tax on Controlled Foreign Corporations (CFCs) on their sale of goods and services into the US; a major modification of the PFIC rules and other simplification measures; and a significant rollback of the portfolio interest exemption.This article will analyze each of these elements of the proposal and then offer some suggestions for further improvement. The two major missing elements from the proposal are additional broad limitations on inbound base erosion and preventative measures against corporate expatriations.