US House passes tax reform plan with overhaul of international tax system 

The US House of Representatives today passed a rewrite of the tax code, agreeing to proposals which would dramatically revise the US international tax system.

The vote was 227-205, passed mostly along party lines, with 13 Republicans joining all Democrats to oppose the bill.

Today’s vote is only one step of a multi-stage process. The Senate must now consider their version of the bill, where Republicans hold only a two-seat majority. If that bill is passed, the differences between the two bills must be ironed out between the two bodies. Both houses must then vote to approve the revised bill.

The House bill would move the US to a territorial tax system, accomplished by a foreign dividends received deduction. This is coupled with a deemed repatriation of existing earnings held offshore.

The bill’s deemed repatriation tax rate was set at 14 percent for accumulated earnings comprised of cash or cash equivalents and 7 percent for other earnings.

The plan is buttressed by base erosion rules that require US parent corporations to pay current tax on one half their subsidiaries’ “foreign high returns,” namely, an amount considered greater than a routine profit. This provision is designed to discourage MNEs from shifting property, such a intangible property and risks, to low tax jurisdictions.

Another provision, designed to curtail inbound interest stripping advantages of foreign multinationals, would impose a 20% excise tax on payments (other than interest) made by a US corporation to a related foreign corporation that are deductible or includible cost of goods sold or in the basis of a depreciable or amortizable asset. This treatment can be avoided if the US corporation elects to treat the payments as effectively connected income.

Further, the plan limits tax deductions for intercompany debt for a US corporation that is a member of an “international financial reporting group” based on the US corporation’s share of global EBITDA.

A another provision would limit the deduction for net interest expense incurred by a business for amounts in excess of 30% of its adjusted taxable income.