Senator Baucus wants to make the "active financing" exception to Subpart F income permanent and has introduced S.940 for that purpose. See Baucus, Hatch Propose Permanent Subpart F Exception for Active Financing Income, BNA Daily Tax Report, March 22, 2007, at G-2. What is the active financing exception? It permits multinationals to avoid tax on their full worldwide income when they establish "captive" foreign financing subsidiaries. The exception for active financing income was repealed in the tax reform act of 1986, but multinational corporations lobbied hard to get it reinstated. It was ultimately reenacted as a "temporary" provision in 1997, and a similar exception for captive insurance income was added in 1998. Annual (or more) "extensions" of the exception have been fought for each year, and each year the Senate and House have caved. The 2005 tax act (enacted in 2006) extended the exception through 2009. Baucus wants to use precious tax revenues that we could be using to help Katrina victims in New Orleans or for education or health care reform to make the temporary exception into a permanent deferral mechanism. Shame on him. Instead, the temporary exception should finally be allowed to expire.
Neal in the House introduced similar legislation (H.R. 1509). Neal called this deferral of tax an "important incentive". See Neal Offers Bill, Daily Tax Report, March 16, 2007, at G-7. It is argued that deferral is important to help US multinationals remain competitive in a global market.
Baucus and Hatch said in a news release the bill is intended "to protect the jobs that U.S. financial services companies have created in the U.S., by keeping the industry on an equal tax footing with its international competitors." Mar. 21, 2006 Daily Tax Report RealTime Alert.
Keeping the industry "on an equal tax footing with its international competitors" means helping US companies have more business that is rooted in foreign countries. But when you ask what is the benefit to the US of multinationals' global competitiveness, the answers don't add up to much. In fact, Multinationals that are not taxed on that income in the US find it easier to expand abroad, creating jobs and adding investment overseas, not increasing jobs and adding to investments here. Multinationals who are not taxed in the US also do find it easier to make bigger profits which they pass on to their owners. But those owners may well not be US citizens, and even if they are, they are taxed at a very low rate on their corporate dividends. Many of those owners are wealthy tycoons in China, Japan, the UK and Indonesia--again, not a clear benefit to the US.
Senator Kerry has introduced a bill that would end deferral of active business income earned abroad, putting multinationals based in the US on the same footing with domestic corporations. That is the sensible way to go. See this summary of 96 (introduced Jan. 4, 2007).
Senate Finance Chair Max Baucus and Representative Neal just do not seem to get it--we have given enormous tax cuts to big business over the last six years, and Americans want to see our tax policy return to one that pays attention to the needs of ordinary taxpayers while not bankrupting the country providing big business further tax breaks. Business will claim it is overtaxed down to the last penny. It's the responsibility of our Senators and Representatives to withstand that pressure in the interests of a strong US economy.
revised slightly 3/25/07
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