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Support grows for U.S. offshore corporate income tax cut: lawmaker

By Kim Dixon

WASHINGTON (Reuters) - Support from U.S.-based multinational companies is coalescing around a proposal to stem offshore profit shifting and cut the tax rate on some corporate profits, a top congressional Republican working to revamp the tax code said on Thursday.

Under the proposal, income from intangible assets such as patents and trademarks earned by U.S. companies abroad would face an immediate 15 percent tax rate. That would be well below the present 35 percent tax rate that can be deferred by leaving profits abroad. Companies would also get an immediate deduction for taxes paid.

This would represent a major shift in U.S. taxation of the foreign profits of U.S. multinationals, many of which now park profits offshore, often in countries where taxes are very low, or through methods that allow them to avoid tax altogether.

"Companies would feel less pressure to shift income to low-tax jurisdictions because that income would be taxed at the same rate - whether it is earned in the United States or Bermuda," Dave Camp, chairman of the Ways and Means Committee in the U.S. House of Representatives, said at a hearing on Thursday.

The session comes at a time of heated discussion in Europe, and to a lesser degree in the United States, about corporate tax evasion. The problem is expected to be a point of discussion at next week's Group of 8 meeting of the leaders of the world's top industrialized nations in Northern Ireland.

On Capitol Hill, momentum toward overhauling the U.S. tax code, including laws covering multinationals, stalled last month amid a political controversy at the U.S. Internal Revenue Service. Camp is trying to get overhaul efforts moving again.

Camp's goal is to cut the top corporate and individual tax rates to 25 percent. In a draft proposal issued in 2011, the Michigan lawmaker proposed three options to prevent erosion of the tax base under any plan to trim the corporate tax rate.

He said that one method, dubbed "Option C" got "the most support from the business community."

That option would impose an immediate 15 percent tax rate on certain "intangible" income earned offshore by U.S. companies. Intangible income is highly mobile.

Profits of this sort are presently taxable at the 35 percent corporate income tax rate, though many multinationals avoid paying that rate by leaving the profits overseas. No tax is due on much of offshore profits as long as they are not brought into the United States under a practice known as offshore tax deferral.

Camp has vowed to move legislation out of his panel this year to revamp the convoluted and widely disliked U.S. tax code for the first time since 1986.

STATELESS INCOME

University of California law professor Edward Kleinbard was skeptical of Camp's approach. Kleinbard said it would be extremely difficult to estimate the profits from intangible assets.

Kleinbard, a former chief of staff to the congressional Joint Committee on Taxation, said at the hearing that stronger measures are required. He proposed mandating that companies reveal where their income is earned and the tax rates they paid around the world.

That would help solve the problem of "stateless" income, which came up at a congressional hearing last month on computer giant Apple Inc.'s tax planning.

The Senate Permanent Subcommittee on Investigations found that Apple in 2012 avoided $9 billion in U.S. taxes using a strategy involving three offshore units with no discernible tax home or "residence."

Apple Chief Executive Tim Cook said the company abides by all tax laws and made no apologies for its tax planning.

But Kleinbard said "The stream of tax-free foreign income encourages U.S. firms to engage in tax arbitrage, by leaving all their global interest expense in the U.S. parent, where it erodes the domestic tax base."

Camp's Democratic counterpart in the Senate, Finance Committee Chairman Max Baucus, is working on a parallel effort to revamp the code.

Both leaders face major hurdles, including divisions among the parties about whether to raise new revenue and which "loopholes" to cut to fund lower rates.

(Editing by Kevin Drawbaugh and Dan Grebler)

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