Vive La Petite Difference: Camp, Obama, and Territoriality Reconsidered

The recent tax reform proposals by House Ways and Means Committee Chair David Camp, R-Mich., and by President Obama seem to offer starkly contrasting visions of how to reform the taxation of foreign-source income earned by U.S.-based multinational enterprises.1 Both acknowledge the problem, which is that U.S.-based MNEs currently have more than $1 trillion of ‘‘permanently reinvested’’ income offshore, which they cannot bring back to the U.S. without incurring a 35 percent tax penalty. However, they seem to offer radically different solutions: Under the Camp proposal, a participation exemption will enable U.S.-based MNEs to bring back the income without paying significant tax. Under the Obama proposal, deferral will be abolished and U.S.-based MNEs will have to pay a minimum tax on foreign-source income earned by their controlled foreign corporations as it is earned. The result would be that the tax penalty on repatriating that income would be reduced because dividends would only be subject to tax at the difference between the statutory rate (reduced to 28 percent under the Obama proposal) and the minimum rate