Double Taxation: A Take On All Things Taxes

With the battle surrounding the Bush tax cuts between President Obama and Mitt Romney taking center stage as the election nears, an area of the tax law where the two candidates may have even more disparate views has slipped into the background.

In the international tax arena, Mitt Romney has thrown his support behind a move to a pure “territorial” tax system. In such a system, U.S. tax would never be imposed on income earned from non-U.S. sources by a foreign subsidiary of a U.S. corporation. The foreign subsidiary would also be permitted to repatriate the earnings with tax-free dividends to its U.S. parent, which — the theory goes — would eliminate the current penalty for bringing foreign earnings back to the U.S., and thus encourage domestic investment and growth.

Detractors of the territorial system — with President Obama foremost among them — argue that this system encourages U.S. corporations to shift operations to jurisdictions with lower tax rates, taking jobs and revenue along with them and eroding the U.S. tax base. As a result, the President has strongly encouraged legislation that would penalize U.S. corporations that move business overseas, while providing incentive in the form of tax breaks for those U.S. companies that currently have operations abroad to bring business back home.

It appears Senate Democrats are ready to push forward with the President’s mandate, as they announced today that the plan to vote next month on a proposal that would accomplish both goals.

The proposed legislation, titled the “Bring Jobs Home Act,” would grant companies a  20% tax credit for the expenses incurred in bringing jobs and investment to the U.S., while also denying companies a deduction for the expense of moving investment out of the U.S.

With regards to the credit, the bill provides that if pursuant to an insourcing plan, a company incurs expenses (aside from normal operating expense and severance expenses) to eliminate a business unit located outside the U.S. and establish a new business unit in the U.S., then upon completion of the relocation the taxpayer is entitled to a credit equal to 20% of the qualified expenses. The bill also provides that the taxpayer may alternatively elect to take the credit in the year after it would typically be allowed.

On the disallowance of the deduction for outsourcing U.S. activities, proposed I.R.C. § 280I would deny any expenses incurred by the taxpayer to relocate the operations outside the U.S. For these purposes, the definition of “expenses” is the same as that used in defining the expenses eligible for the credit.

Voting should take place by July 4th.