Wednesday, November 10, 2010

Bowles-Simpson Commission Calls for Major Overhaul of Federal Tax Code

The President’s National Commission on Fiscal Responsibility and Reform has called for a complete overhaul of the US federal tax code that would significantly affect public companies, investment companies, hedge funds and offshore funds. The overall goal of the draft proposal is to dramatically reduces rates, simplify the Code, broaden the base, and reduce the deficit. The proposal would consolidate the tax Code into three individual rates and one corporate rate, which would be reduced to 26 per cent. The draft would eliminate or modify several business tax expenditures, including the LIFO method of accounting and depreciation rules.

The draft also proposes international tax reform, including a territorial system. Many foreign corporations that trade with the United States are incorporated in countries, such as Germany, that operate under a territorial tax system. Under a territorial system, income earned by foreign subsidiaries and branch operations (e.g., a foreign owned company with a subsidiary operating in the United States) is exempt from their country’s domestic corporate income tax. Therefore, under a territorial system, profits are only taxed by the country where the income is earned. In contrast, the U.S. tax system is basically a worldwide system whereby companies registered as U.S. domestic companies are subject to taxation on all income regardless of where it is earned. See Joint Economic Committee study.

The Commission co-chairs, Erskine Bowles and Alan Simpson, call on the tax-writing committees, Senate Finance and House Ways & Means, to develop and enact comprehensive tax reform by end of 2012. It is envisioned that the new Code would put in place across-the-board “haircuts” for itemized deductions, employer health exclusion, and general business credits.