Daily Tax Update - February 22, 2012: President Releases Corporate Tax Reform Plan

PRESIDENT’S CORPORATE TAX REFORM PLAN WOULD LOWER TOP RATE TO 28% WHILE REFORMING TAX EXPENDITURES AND ESTABLISHING MINIMUM RATE ON FOREIGN EARNINGS:  Today, the White House and the Treasury Department unveiled President Obama’s corporate tax reform plan (The President’s Framework for Business Tax Reform), which would lower the corporate tax rate from 35 percent to 28 percent while eliminating certain tax expenditures and implementing other reforms.  Certain reforms are specifically recommended, while other reforms are offered as part of a "menu of options" to be considered in order to lower the rate to 28 percent.  The report also recommends establishing a new minimum tax on foreign earnings (the specific mechanics of which are not described in the report).

  • The framework’s introduction stated, "America’s system of business taxation is in need of reform.  The United States has a relatively narrow corporate tax base compared to other countries—a tax base reduced by loopholes, tax expenditures, and tax planning.  This is combined with a statutory corporate tax rate that will soon be the highest among advanced countries.  As a result of this combination of a relatively narrow tax base and a high statutory tax rate, the US tax system is uncompetitive and inefficient.  The system distorts choices such as where to produce, what to invest in, how to finance a business, and what business form to use.  And it does too little to encourage job creation and investment in the United States while allowing firms to benefit from incentives to locate production and shift profits overseas."
  • The report outlines what "five key elements of business tax reform:"
    • "I. Eliminate dozens of tax loopholes and subsidies, broaden the base and cut the corporate tax rate to spur growth in America:  The Framework would eliminate dozens of different tax expenditures and fundamentally reform the business tax base to reduce distortions that hurt productivity and growth.  It would reinvest these savings to lower the corporate tax rate to 28 percent, putting the United States in line with major competitor countries and encouraging greater investment in America."  The reforms specifically recommended for consideration include the elimination of LIFO, oil and gas tax preferences, and special corporate aircraft depreciation rules; reform of rules relating to insurance companies and insurance products; and the taxation of carried interest as ordinary income.  The reforms mentioned as worthy of consideration (but not specifically recommended) are the elimination of accelerated depreciation, "reducing the bias toward equity financing"; and establishing greater parity between large corporations and large pass-through entities.
    •  “II. Strengthen American manufacturing and innovation:  The Framework would refocus the manufacturing deduction and use the savings to reduce the effective rate on manufacturing to no more than 25 percent, while encouraging greater research and development and the production of clean energy."  The report recommends expanding, simplifying, and making permanent the R&E tax credit and expanding tax incentives for investment in clean energy.
    •  “III. Strengthen the international tax system, including establishing a new minimum tax on foreign earnings, to encourage domestic investment:  Our tax system should not give companies an incentive to locate production overseas or engage in accounting games to shift profits abroad, eroding the US tax base.  Introducing a minimum tax on foreign earnings would help address these problems and discourage a global race to the bottom in tax rates."  According to the report, "foreign income deferred in a low-tax jurisdiction would be subject to immediate US taxation up to the minimum tax rate with a foreign tax credit allowed for income taxes on that income paid to the host country."  Other reforms, including the Administration’s proposals to tax "excess returns" currently and to require deductions for interest expenses attributable to offshore investments to be deferred until the related income is repatriated, are also recommended.
    •  "IV. Simplify and cut taxes for America’s small businesses:   Tax reform should make tax filing simpler for small businesses and entrepreneurs so that they can focus on growing their businesses rather than filling out tax returns."  Specifically, the report recommends expanding bonus depreciation for small businesses, allowing cash accounting for businesses with up to $10 million in gross receipts, doubling the deduction for start-up costs, and reforming and expanding the health insurance tax credit for small businesses.
    •  "V. Restore fiscal responsibility and not add a dime to the deficit:  Business tax reform should be fully paid for and lead to greater fiscal responsibility than our current business tax system by either eliminating or making permanent and fully paying for temporary tax provisions now in the tax code." 
  • The framework can be accessed here.
  • For additional information, contact Philip R. West - pwest@steptoe.com or Amanda Varma - avarma@steptoe.com

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As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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