Territorial W&M Discussion Draft: Change Required

Abstract

The House Ways & Means Committee Discussion Draft proposes a territorial taxation system for the United States. This article published in Tax Notes on 23 January 2012 was taken from the author's comments on the Discussion Draft as submitted to the Committee in conjunction with a hearing held on 17 November 2011. See full comments at http://ssrn.com/abstract=1997482. The full comments include many additional issues not covered in this article.

The Discussion 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 "taxable 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.