Tax Proposals for Multinational Enterprises

• DOI: http://doi.org/10.1002/jcaf.22088
• Published date: 01 September 2015
• Author: Caroline D. Strobel
• Date: 01 September 2015

107

© 2015 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22088

D

e

p

a

r

t

m

e

n

t

s

IRS

Tax Proposals for Multinational

Enterprises

Caroline D. Strobel

In February, President Obama

issued the administration’s rev-

enue proposals for fiscal year

2016. This column will cover

only the portion of the presi-

dent’s proposals that are aimed

at our international tax system.

In March, Senators Rubio and

Lee introduced a tax bill that

represents the thinking of some

Republicans. Their bill would

provide a much more stream-

lined tax system. This column

will review these proposals.

Itis likely that nothing that

has been proposed will actu-

ally be enacted, but it gives us

a look at the thinking of the

two political parties and may

give us insight into future tax

legislation.

PRESIDENT’S PROPOSAL

The major change pro-

posed for taxation of U.S.

multinationals is the imposi-

tion of a 19% minimum tax on

foreign income. The reason for

this proposal is that controlled

foreign corporations (CFCs)

are allowed to defer the tax on

their foreign earnings, while at

the same time the U.S. parent

is allowed to currently deduct

certain expenses attributable

to the deferred earnings such

as interest. This is cited as a

way to shift profits abroad,

which erodes the U.S. tax

base. The current system then

discourages the repatriation

of these low‐taxed earnings,

where they would be taxed in

the United States on the dif-

ference between the U.S. tax

and the amount of tax paid

in the foreign country. This is

accomplished by taxing the

earnings using the U.S. tax

rate and then taking foreign

tax credit (an amount approxi-

mately equal to the tax paid

in the foreign country). The

administration also cites the

fact that the current foreign tax

credit system allows companies

to utilize credits from high‐tax

foreign‐source income such as

dividends to reduce U.S. tax on

low‐tax foreign‐source income

such as royalties. Finally, they

cite the fact that it may be dif-

ficult for the IRS to verify that

a taxpayer has exhausted prac-

tical remedies under foreign

law to reduce its reasonably

expected foreign tax liability

over time in a manner consis-

tent with a reasonable interpre-

tation of foreign tax law.

Under the administra-

tion’s proposal, there would

be imposed a per‐country

minimum tax on the foreign

earnings of entities taxed as

domestic C corporations (U.S.

corporations) and their CFCs.

The minimum tax would apply

to a U.S. corporation that is

a U.S. shareholder of a CFC

or that has foreign earnings

from a branch or from the per-

formance of services abroad.

These earnings would be sub-

ject to current U.S. taxation at

a rate (not below zero) of 19%

less 85% of the per‐country

foreign effective tax rate (the

residual minimum tax rate).

The foreign effective tax rate

would be computed on an

aggregate basis with respect

to all foreign earnings and

the associated foreign taxes

assigned to a country for the

60‐month period that ends on

the date on which the domestic

corporation’s current taxable

year ends.

In connection with the

transition to this minimum tax,