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US Republicans debating remedies for corporate tax avoidance

Companies have accumulated some $2.6 trillion in abroad

Reuters  |  Washington 

President Donald Trump
President Donald Trump

President and Republican leaders in will soon confront a complex challenge for reform: how to limit US corporate avoidance schemes that take advantage of low rates in foreign countries.Congressional and administration staff have begun to examine options to address profit-shifting schemes that include so-called transfer pricing, earnings stripping and inversions. A decision on how to handle these in legislation could come before leaves town for its one-week July 4 recess on June 29, officials and lobbyists said.

Lawmakers say the current code incentivises profit shifting overseas because of the high 35 per cent US corporate rate and rules that allow companies to hold profits abroad free until returned to US soil.

Without effective measures against avoidance, experts and lobbyists said legislation could trigger a new exodus of income and assets abroad. Because Trump and Republicans in also want to end US taxes on foreign earnings, companies could eliminate their US bills altogether without restrictions.

reduction strategies have been employed for decades by companies including Microsoft Corp, Apple Inc and Inc.

Independent analysts estimate the federal government misses out on more than $100 billion a year in corporate revenues as a result of reduction maneuvers. That is equal to one-third of the $300 billion in annual corporate revenues.

Many schemes seek lower corporate bills through "transfer pricing" - using transactions between business units to shift income abroad. The shift often coincides with the transfer of intangible assets such as intellectual property to low-nations where companies can expect single-digit rates.

Last week, Senate Finance Committee Democrats asked Treasury Secretary Steven Mnuchin to leave in place regulations adopted under President Barack Obama to combat earnings stripping and inversions.

Companies use earnings stripping to shift income abroad as tax-deductible interest payments to foreign affiliates.

Inversions are mergers in which US companies move their headquarters to foreign countries with low taxes, if only on paper, to lower their US bills.

Companies have accumulated some $2.6 trillion in abroad, equivalent to more than three-quarters of the $3.3 trillion in annual government receipts expected this year.


But the most effective measures against corporate avoidance schemes, including House Speaker Paul Ryan's controversial border-adjustment tax, or BAT, have proved unpopular, raising the possibility that legislation could simply cut the corporate rate to 15 per cent to reduce the advantages offered by foreign havens.

Aside from BAT, which taxes imports but not exports, reform discussions are also looking at a minimum on profits from havens, a on intangible income and other measures to discourage companies from shifting profits to low-countries where they do little actual business, according to aides and lobbyists.

Lobbyists said none of the options have enjoyed consensus support in Meanwhile, the idea of a simple rate cut does not sit well with House Republican leaders.

"Even with a low rate, we'll continue to see US jobs and research and headquarters move overseas," said House Ways and Means Committee Chairman Kevin Brady, a leading BAT proponent.

Experts warn that the 15 per cent rate sought by Trump is well above a five per cent effective rate that some corporations pay in countries like Ireland, the Netherlands and Luxembourg.

Brady and Ryan are expected to address the issue in coming weeks with Mnuchin, White House economic adviser Gary Cohn, Senate Republican leader Mitch McConnell and Senate Finance Committee Chairman Orrin Hatch. The six are trying to forge legislation that could be unveiled as early as September.

Trump has pledged the biggest overhaul since Ronald Reagan. But Republican infighting over healthcare has delayed the timetable.