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Fight brewing over U.S. offshore profit taxation

Sep 14, 2011, 4:05 a.m.

Such far-reaching reform is unlikely to happen without broad tax reform. That is unlikely to come soon. Congress' "super committee" on deficit reduction, which had its first hearing on Monday, does not have enough time for tax reform and November 2012 elections will make it difficult, analysts said.

The White House's bipartisan Bowles-Simpson deficit reduction panel last year endorsed territorial taxation. Major corporate lobbying groups are banging the drum for it.

The business community is not solidly in favor, however. Multinationals tend to back it. Small and mid-sized companies with less to gain generally are not as enthusiastic.

"I'm a proponent of a territorial system," said Harvard Business School Professor Fritz Foley, citing his concern about other nations, including Japan and Britain, embracing it.

"Having said that, any move to territorial needs to be ... thought through quite carefully," he said.

As for the inevitable political firestorm that would accompany a major push for tax reform, Foley remarked:

"Anything is going to be a tough sell politically, but ... some adults need to stand up and say, here are the trade-offs, here is our fiscal reality, let's think about the best way forward ... My reading of the situation in Washington now is that we're not exactly close to that."

SOME COUNTRIES GO TERRITORIAL

The main argument made in territorial taxation's favor is that everyone is doing it, so the United States should too.

Territorial taxation has been adopted, in one form or another by Canada, France, Germany, the Netherlands, Australia, Switzerland, Japan and Britain. Not adopting it puts the United States at a competitive disadvantage, say its supporters.

"We are so out of step with the rest of the world right now. It is important for us to adopt a territorial system," said University of Michigan Law School Professor James Hines.

Others take a different view.

"I do not agree that we should go to a territorial system," said University of Michigan Law School Professor Reuven Avi-Yonah. "The United States has traditionally been a leader, not a follower, in international tax matters."

Nations that still have a worldwide system of taxation for foreign corporate profits, resembling the U.S. system, include Korea, Chile, Greece, Ireland, Israel and Mexico.

China, Brazil and India, growing economies with thriving manufacturing sectors, also tax the foreign income of their companies much the same way the United States does. "Those are our real competitors," not tax-haven nations, said Avi-Yonah.

A territorial system would prompt U.S. companies to shift offshore even more income than they already do and jobs would follow, worsening unemployment and the economy, critics say.

"Giving corporations a permanent tax exemption for their purported offshore profits will make things much worse. The only real solution is for Congress to do the opposite" and repeal foreign income deferral, said Bob McIntyre, director of Citizens for Tax Justice, a left-leaning tax watchdog group.

(Editing by Howard Goller)

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