Lifting the Handicap

By lowering the corporate tax rate, can the United States regain a competitive edge?

Repeal of worldwide allocation of interest. Current law, which has yet to take effect, allows U.S. corporations to elect special-interest allocation rules that reduce the amount of interest expense allocated to foreign assets. (Estimated to raise over 10 years: $26 billion.)

Limitations on treaty benefit for deductible payments. The bill would prevent foreign multinationals that are incorporated in tax-haven countries from avoiding tax on income earned in the United States. The provision addresses multinationals that route income through structures that allow a U.S. subsidiary to make a deductible payment to a country that has a tax treaty with the United States. Usually, the company repatriates the earnings in the tax-haven country after the deduction is taken. (Estimated to raise over 10 years: $6 billion.)

Repeal of the LIFO inventory accounting method. Any income recorded as a result of the proposed repeal of the last-in, first-out accounting method for booking inventory would be taxed over eight years. (Estimated to raise over 10 years: $107 billion.)

Repeal of the inventory valuation choice method. The bill would require corporations to value inventories at cost, eliminating the opportunity to choose between the lower of cost and market value. (Estimated to raise over 10 years: $7 billion.)

Elimination of the special service-provider rule. The provision would prevent larger corporations (defined as C-corporations in the tax rules) that use the accrual method of accounting from taking advantage of the special rule pertaining to service providers. The current rule allows C-corps to not account for amounts that will go uncollected based on the history of the service provider. (Estimated to raise over 10 years: $225 million.)

Permanent extension of enhanced small-business expensing. The bill would extend the current threshold amounts that small businesses can count as a tax-deductible expense. The rule is scheduled to expire in 2010, but the proposal would allow businesses to continue at current levels — that is, $125,000 (indexed for inflation) with a phase-out threshold of $500,000 (also indexed for inflation). After 2010, if the law is not changed, small businesses would be able to expense only $125,000, with a $500,000 phase-out threshold, and neither expense mark would be indexed for inflation. (Estimated cost over 10 years: $21 billion.)

Increase in the amortization period for intangible assets. The bill would increase the current 15-year amortization period for intangibles to 20 years. (Estimated to raise over 10 years: $21 billion.)

Clarification of the economic-substance doctrine. In any transaction in which economic -substance analysis is required, the doctrine would be satisfied only if: (1) the transaction changes — in a meaningful way — the corporation’s economic position (apart from federal income tax consequences); and (2) the corporation has a substantial non-federal tax purpose for entering into the transaction. The provision also imposes a 20 percent penalty on understatements that stem from a transaction lacking economic substance. The fine rises to 40 percent if relevant facts are not adequately disclosed. (Estimated to raise over 10 years: $4 billion.)

Decrease in the deductions allowed for dividends received. For a 20 percent–owned corporation, the deduction would drop from 80 percent to 70 percent. For dividends currently eligible for a 70 percent reduction, the tax break would fall to 60 percent. (Estimated to raise over 10 years: $5 billion.) — Marie Leone

Taxed to the Max

The 10 highest global tax rates

39.5%: Japan

39.3%: United States

37.3%: Italy

36.1%: Canada

34.4%: France

34.0%: Belgium

33.0%: New Zealand

32.5%: Spain

30.4%: Luxembourg

30.0%: Germany

Source: The Tax Foundation

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