–No to Any Repatriation Holiday; Repatriation Policy Up for Discussion

By Denny Gulino

WASHINGTON (MNI) – The Obama administration placed its corporate
tax reform wish list on the negotiating table Wednesday, with a 28%
overall rate along with the elimination of tax breaks by the tens of
billions, hoping some of it survives after Election Day and meanwhile,
apparently, that it helps gain some business support.

Treasury Secretary Tim Geithner, at midday confirming the details
that appeared first in the morning newspapers, told reporters he will
begin attempting a bipartisan consensus with Republicans and Democrats
on Capitol Hill “hopefully next week.”

“It will be politically contentious,” he acknowledged. “Many will
fight to preserve specific tax preferences and subsidies.”

While business coalitions and industry segments can be counted on
to fight hard to preserve any long-standing privileges, the plan as a
whole seemed designed so it would not necessarily be interpreted as
ideological or generally anti-business.

Those tax breaks total $250 billion and in the plan developed by
the Treasury Department and the White House, those that aren’t
eliminated would be offset by savings somewhere else instead of being
extended year after year with no offsetting savings.

“These subsidies distort choices about where businesses should
invest,” Geithner said. “The business tax system today is bad for
economic growth and bad for job creation.”

The result: the deficit would not be fed by business tax breaks, he
said. However that’s not quite the same as saying it would be “revenue
neutral,” and Geithner did not use those words to describe the desired
end result.

“To do this you have to do it in a way that’s fiscally
responsible,” he said. “We can’t afford to be doing what we have been
doing which is to every year extend a bunch of special preferences and
not pay for them.”

With tax measures originating in the House, currently controlled by
Republicans, in the bitterly partisan atmosphere of an election year,
Geithner was not able to claim there will be any substantial movement
toward corporate or individual tax reform this year.

“Our tax reform framework is designed to begin the process of
building bipartisan consensus on a better growth strategy for the long
term,” he said. “We’re going to see how that process goes.”

“Congress is going to face at the end of this year a set of very,
very difficult choices” he said, “about what to do with the expiring
Bush tax cuts, with the potential impact of the sequester and at that
time is going to have to take another look at how to put in place
long-term fiscal reforms,” including tax reform. The administration is
prepared to offer more specifics when needed.

The corporate tax reform package, he said, could be done alone. “As
you know there are a lot of people who think that … maybe the best way
to do this is maybe alongside and together with comprehensive individual
reform and that may be the way this comes out.”

“Regardless of which path we choose it’s worth starting the
foundational process now,” he said, on the business side.

On repatriation, a subject which means a temporary tax amnesty for
foreign earnings to some, the administration opposition to any “holiday”
outside of a long-term re-engineered international tax regime remains
firm, senior administration officials said after Geithner’s appearance.

In the process of working out a tax structure that contains
incentives for both domestic and foreign companies to locate in the
United States, and allows for U.S. companies that must operate overseas
like hotel chains — and which decides the tax treatment for profits
already earned — then a repatriation system can be negotiated, the
officials said.

A repatriation holiday “is not part of our plan” the official
said. “In the context of a broader reform you’d want to calculate what
to do with those earnings that are held abroad.”

“I think we are going through a process,” one official said.
“There’s no easy give and take.” The effort will be to find “the common
ground.”

Another official said, “A repatriation holiday is a stand-alone
bill by itself, which is ruled out, which we are completely opposed to.”
What has to be worked out is the tax rate on foreign earnings going
forward, and the treatment of all past earnings.

Currently U.S. companies do not pay taxes on earnings across the
border until they are repatriated, “but a lot of companies don’t
repatriate quite a lot of their income.” So what remains is closer to a
“territorial” system of foreign taxation and the new framework
anticipates continuing a “hybrid” system with a minimum tax rate
proposed in Obama budgets the last three years.

In Geithner’s words, “we want to reduce the opportunities the tax
code now provides to shift income and investment outside the United
States.” So together with a new minimum tax on foreign earnings there
would be, he said, “stronger safeguards against transfer pricing abuses,
and replacing tax deductions U.S. companies can now get for relocating
overseas with tax credits for expenses when U.S. companies bring
operations back home.”

Asked why a 28% effective tax rate was made the goal of the plan,
compared to the 35% rate now and not lower, the officials said that
anything below that required realistically impossible changes and that
was the best they could do.

For manufacturing, the plan proposes the same 28% tax rate, but
with a larger 10.7% production tax credit, bringing the end rate to 25%.
For advanced manufacturing, the plan proposes doubling the production
tax credit. “In our system too, 25 would, in effect, would almost be
like a ceiling,” the official said.

Said Geithner about the manufacturing tax plan, “we would replace a
complex mix of temporary incentives that businesses cannot plan for or
count on, with a more limited set of long-term incentives to help
provide certainty for long-term investments.”

In other key elements, the plan would reduce the tax burden on
small business in a simplified tax system.

Many of the details of the corporate tax reform framework are
Treasury Department favorites included in the most recent “Green Book”
that was part of the fiscal 2013 budget proposals last week. Some have
been included in several past budgets as well.

Republican chair of the House Ways and Means Committee, Dave Camp,
late last year outlined his own overhaul of the corporate tax system,
cutting the top rate further but in some ways anticipating the Treasury
proposals on international taxation while moving more toward a strictly
territorial regime.

Camp’s proposal galvanized several business coalitions into action
in support. At the same time Camp’s proposals were attacked by some key
Democrats who may not be any happier with Treasury’s approach. Should a
Republican be elected president or the Senate become controlled by
Republicans, Camp could find his proposals become the ultimate template
for change.

** Market News International Washington Bureau: 202-371-2121 **

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