Senate Finance witnesses differ on taxing foreign profits

Still, the Obama administration has been working on proposals for corporate tax reform, with Treasury Secretary Timothy Geithner indicating he would like to lower the top corporate rate of 35 percent to the mid-20s.

Top Republicans including Reps. Dave Camp (R-Mich.), the chairman of the House Ways and Means Committee, and Rep. Paul Ryan (R-Wis.), the House GOP budget guru, have proposed reducing both the top corporate and individual rates to 25 percent.

But, as the witnesses told senators on Thursday, lawmakers will also have to grapple with tough technical issues like transfer pricing rules to successfully overhaul the code.

As it stands, U.S. corporations are generally taxed on profits they make anywhere in the world, but can defer paying those taxes until the profits are brought to the U.S.

Business leaders have long said that policy discourages investment in the U.S., and both academics and private sector officials pushed Senate Finance on Thursday to join other developed countries who have recently switched over to a territorial system.

Scott Naatjes, general tax counsel for Cargill, Inc, and Philip West of Steptoe & Johnson both also scoffed at the idea that such a move would encourage corporations to shift jobs overseas.

“Some worry that a territorial system would motivate U.S. companies to locate jobs and income overseas, to chase lower tax rates,” Naatjes said. “But the foreign capital investment and economic growth will happen with or without us.”

But Reuven Avi-Yonah of the University of Michigan said he did not believe that U.S. companies were particularly hampered by current tax rules. And, he added, American officials should consider lowering corporate rates by around 10 percentage points and ending deferral, instead of moving to a territorial system.

“The United States has traditionally been a leader, not a follower, in international taxes,” Avi-Yonah said. “I think we should continue to lead.”

And while the panelists generally agreed that tax rates need to come down, Sen. Ben Cardin (D-Md.) also pressed them on what tax credits and deductions they would be willing to see on the chopping block to help pay for those lower rates.

Cardin noted that some of the largest business tax expenditures — such as for research and development and a deduction allowing businesses to more quickly write off equipment purchases — are fairly popular.

James Hines, also of the University of Michigan, told lawmakers that many academics wouldn’t mind seeing the accelerated depreciation deduction and a separate manufacturing deduction named Section 199 tossed out.