Contemplated Move to Territorial Tax System Could Have Significant Negative Impact on Some Large U.S. Multinationals, Including Certain Pharma and Tech Firms

By Stuart E. Leblang, Michael J. Kliegman, Geoffrey K. Verhoff,  Amy S. Elliott, and Ryan Ellis

Republicans in Congress and the administration have coalesced around a few key elements of the comprehensive tax reform plan that they expect to advance this fall.  But just because they have decided to abandon the controversial border-adjusted tax (BAT) does not mean that all businesses will come out winners.

One of the major areas of agreement is a move to a territorial system of taxation so that the United States would generally only tax the domestic income of its companies.¹Tax writers think that even without the BAT, “there is a viable approach for ensuring a level playing field between American and foreign companies and workers, while protecting American jobs and the U.S. tax base.”² We are hearing three points of consensus that are likely to be of significant concern to certain U.S. multinationals:

1. Tax writers intend for the move to territorial to be permanent and fully paid for potentially exclusively by other changes to the U.S. system of taxing cross-border business income. Territorial is often effected by exempting from U.S. tax all or nearly all of the dividends that foreign subsidiaries pay back to their U.S. parents, which could cost as much as $225 billion over 10 years.³ If tax writers are able to pay for that tax cut exclusively with international revenue raisers (most likely anti-base erosion measures that preserve U.S. tax jurisdiction for as much income as possible), that could mean the overall tax burden on U.S. multinationals will remain the same.
2. The revenue generated from a deemed repatriation of post-1986 undistributed foreign earnings (about $170 billion over 10 years ⁴  ) cannot be used to offset the cost of a move to territorial outside the 10-year budget window. Because it is a one-time pick-up from the transition to territorial, other permanent international revenue raisers will need to be in place by year 10 to cover the full cost of territorial going forward.  But it can be used to phase in the anti-base erosion measures over the first decade to ease the blow.
3. If lawmakers insist that international tax reform must pay for itself outside the budget window, they may need to impose harsher anti-base erosion measures than those proposed in the Tax Reform Act of 2014, which would have turned off territorial for mobile income in a proposal commonly referred to as Option C. Opponents warned that Option C would “significantly disadvantage the most innovative U.S. companies,” ⁵ but in a worst case scenario, Option C may need to be nearly twice as painful this time around in order to make the numbers work.  (We go into the numbers on this point on page 9.)

What does this mean for traders and the companies that they follow?

• According to Tax Analysts’ economist Martin A. Sullivan, if something like Option C is enacted, “approximately three-quarters of the income of foreign subsidiaries of U.S. multinationals will be subject to a new minimum tax” given the broad definition of foreign base company intangible income. ⁶ Lawmakers are thinking that the minimum tax will either be 10 percent or as high as 25 percent, depending on whether the income stems from foreign or domestic consumption. Consider that today, some companies benefit from a negative effective corporate tax rate on the return from an investment in intangible assets (because of tax preferences like full expensing for research costs). ⁷ 
• The U.S. multinationals that will most likely be harmed are those that earn high foreign profits while having few foreign tangible assets. Such companies can be found in the pharmaceutical and technology industries, among others.  A group of big pharma and tech companies—the Tax Innovation Equality (TIE) Coalition—has been vocally opposed to Option C.  ⁸ Members of the coalition include:  Adobe Systems Inc., BMC Software, Brocade Communications Systems, Merck & Co. Inc., Microsoft Corp., Netflix, Symantec Corp., VMware Inc. and Xilinx Inc.  These are powerful businesses, and lawmakers could be inclined to appease their concerns.
• However, the flexibility to repatriate foreign cash that comes along with a move to territorial will directly benefit many pharma and tech companies, so the harm from Option C could be offset. Not only will a move to territorial allow them to repatriate the foreign earnings that they had been indefinitely reinvesting offshore in order to avoid a 35 percent U.S. tax, but also it will prevent future foreign earnings from being trapped outside the United States.  The companies with the largest hordes of offshore cash include:  Microsoft, Apple Inc., Pfizer Inc., General Electric Co., International Business Machines Corp., Johnson & Johnson, Cisco Systems Inc., Merck, Alphabet Inc. and Exxon Mobil Corp. ⁹ 
• Skeptics are concerned that minimum tax proposals like Option C could exacerbate inversions and foreign takeovers of U.S. companies by cutting off the types of planning that have enabled U.S. multinationals to lower their foreign effective tax rates enough to stay competitive with their foreign-parented rivals.¹⁰With such limitations, foreign acquirers will likely be able to pay more for companies. But without such limitations, the tax base would be threatened. ¹¹ 

A More Draconian Version of Option C?

Why would tax writers take the one thing everyone agrees needs fixing—the U.S. system of international taxation—and make fixing it even more challenging by requiring it to be fully paid for on its own outside of the budget window?  One reason is because Republicans have decided to tackle tax reform using reconciliation, meaning that any provision¹²that would increase the deficit relative to current law during a fiscal year outside of the budget window can be removed from legislation under the so-called Byrd Rule.

But another reason is likely an acknowledgement that the public does not want to pay for a tax cut on multinationals that, in some cases, already pay lower effective tax rates than many individuals.  A recent poll found that 67 percent of Americans think corporations pay too little in taxes. ¹³ Of all the groups in the poll (including upper-income people), corporations were deemed the least likely to be paying their fair share.

The last time there was a comprehensive overhaul of the tax code (the Tax Reform Act of 1986), Congress reduced the tax burden on individuals by paying for it with an almost equal tax hike on corporations.¹⁴  In 2014, the comprehensive tax reform plan put forth by then-House Ways and Means Committee Chairman Dave Camp also would have lowered taxes on individuals (by nearly $600 billion over 10 years) while correspondingly increasing the business tax burden. ¹⁵  On the other hand, unofficial scores of House Republicans’ June 2016 tax reform Blueprint entitled “A Better Way” indicate that that plan would have done the opposite:  paid for a reduced tax burden on businesses with increased taxes on individuals. ¹⁶ Using corporate money to pay for corporate rate cuts is likely an easier sell politically.

Those who doubt Republicans’ willingness to combat base erosion by U.S. multinationals need only look to recent comments by Congressional leadership.  Senate Finance Committee Chairman Orrin Hatch (R-Utah) acknowledged July 20 that while our current worldwide tax system impedes the ability of U.S. “multinationals to compete in the world marketplace,” a move to territorial must include provisions “ensuring protection of the U.S. tax base from things like earnings stripping and profit shifting.” ¹⁷ In addition, the fiscal year 2018 budget resolution passed by the House Budget Committee the same day included a policy statement on tax reform providing that international tax reform should “significantly reduce tax avoidance.”¹⁸

But what some may not realize is that Option C and the other anti-base erosion measures proposed by Camp in 2014 do much more than combat earnings stripping and profit shifting.  Option C would have effectively turned off territorial for highly mobile income and taxed it currently at either 15 percent or 25 percent depending on whether it was related to foreign or domestic consumption.  But because mobile income is hard to quantify, it uses a formulary approach (or proxy—for more on this, see page 8) that ultimately taxes something completely unrelated to mobile income, causing dramatic and unexpected consequences for firms with foreign operations.

In theory at least, the centerpiece of Option C (the creation of a new category of subpart F income—foreign base company intangible income or FBCII) was designed to tax the income derived from intellectual property (IP, such as patents, trademarks and copyrights) at a flat rate no matter where the IP was located (in the United States or abroad).  In practice, it taxes a proxy for such income, explained in more detail on page 8.

Some relatively good news for U.S. multinationals is that lawmakers are thinking they may be able to get away with a rate of 10 percent (instead of 15 percent) for FBCII that is foreign derived (granted “good” is relative here given that some firms pay much less than 10 percent on such income today). ¹⁹ To prevent U.S. companies from exporting products (only to later import them for sale in the United States) in order to convert the FBCII into income that is foreign derived, there is an anti-round-tripping measure that effectively turns off territorial (and taxes at the top corporate income tax rate, which was 25 percent in the Camp draft) for FBCII that is derived from property ultimately sold for use, consumption or disposition in the United States. ²⁰  IP income from related-party transactions is presumed to be derived in the United States.

The difference between foreign-derived FBCII taxed at (likely closer to) 10 percent and U.S.- derived FBCII taxed at (the top corporate rate of likely closer to) 25 percent is where the ultimate consumption takes place.  If that rings a bell, it is because it was an element of the controversial BAT, which only taxed income related to consumption in the United States (denying deductions for imports and excluding from taxation the income from exports).  While drafters of the BAT likely struggled with how they would identify income (and expenses associated with) goods or services sold for consumption in the United States, a similar problem does not exist with the tax on FBCII because of the proxy (see page 8).

*Ireland has a special 6.25% Knowledge Development Box tax rate for income from IP.  Lawmakers are reportedly considering giving credit for foreign taxes paid not on a country-by-country basis, but on a weighted average basis across all foreign subs.

A lower tax rate on FBCII (at least for foreign derived income) does not necessarily mean businesses will warm to Option C.²¹Many businesses oppose the definition of FBCII, which Camp ultimately de-linked from IP.  The proxy looks to the amount of physical tangible property located abroad.  U.S. companies that locate their IP abroad and spend most of their capital abroad on people, contract manufacturing services or financial services (and not on buildings or equipment) could be at a real disadvantage.  We will touch more on this point on page 8.

Means to an End—Repatriation

Anti-base erosion proposals like Option C and its anti-round-tripping measure are safeguards necessary to effect the dramatic move to territorial that will allow U.S. multinationals to finally repatriate their offshore cash.  This repatriation will most likely²²be a mandatory deemed one, not an elective holiday as in the past. Domestic companies with previously untaxed foreign earnings indefinitely reinvested outside the United States will be required to pay tax as if they had repatriated those historic earnings (post-1986), albeit at reduced rates (even if they leave the earnings offshore).  Instead of imposing a 35 percent toll-charge, lawmakers are thinking of taxing the windfall at less than 10 percent.²³

Lawmakers, CFOs and shareholders all want the $2.6 trillion²⁴of untaxed cash held offshore as disclosed by 526 companies in the Russell 1000 to be unleashed to pay down debt, pay out dividends and engage in mergers and acquisitions.²⁵And the biggest beneficiaries are expected to be tech and pharma companies.²⁶

But analysis of which firms will come out winners and which will come out losers is not that simple.  Many of the companies that have the largest stashes of earnings eligible for repatriation—such as Microsoft²⁷ and Merck²⁸—are also companies that stand to be hurt by Option C, which some are decrying as a minimum tax on income from intangibles.

Option C Perspective—A Carrot and A Stick

A growing share of corporate profits is allocated to IP sourced in low-tax jurisdictions.²⁹The tax- oriented migration of IP and related income is something U.S. lawmakers are concerned about as other countries offer incentives like patent boxes.  Option C would ensure that if such income is earned by a corporation under a U.S. parented multinational (or directly earned by the U.S. parent), it is subject to a minimum tax.  If the income is from the sale of goods or services linked to the IP but for use in a foreign country, it could benefit from the lower 10 percent rate.  If the income is from the sale of IP-linked goods or services for use in the United States, it could be subject to the higher 25 percent rate.

Businesses are changing.  According to the World Intellectual Property Organization, 80 percent of the asset value of companies comes from intangible assets (before the 1980s, it was tangible assets that made up 80 percent of companies’ value).³⁰It is because of the changing makeup of U.S. multinationals’ income (cue the macroeconomic experts at the Joint Committee on Taxation or JCT) that tax writers are thinking they may be able to reduce the 15 percent ³¹ rate for foreign-derived IP income that was in the original Option C proposal down to 10 percent.³²

IP is also critical to multinationals’ tax minimization strategies.  Absent a proposal like Option C, a move to territorial could gut needed corporate tax revenues.  This is a reality policymakers have been struggling with for decades.  A minimum tax on the mobile income of foreign subsidiaries is not a new idea.³³

Imposing a minimum tax on mobile income makes a lot of sense conceptually.  Because the FBCII regime—in theory at least—imposes a certain amount of tax on income derived from IP no matter where the IP is located, companies have no reason not to locate IP in the United States.  That is the carrot aspect of the provision.  The stick aspect removes the benefit of locating IP in a tax haven.

The FBCII regime also disincentivizes U.S. multinationals from locating their IP-profit generating activities offshore if the profits stem from importing products and services into the United States.  Imposing tax at the top rate of 25 percent on such income ensures that a move to territorial will not enable multinationals to simply rearrange their structures so that a foreign entity earns the income from U.S.  sales, allowing it to potentially escape the U.S. tax net entirely.

The Proxy for Income Attributable to IP

There are a number of tricky aspects to Option C, but the most critical one is that it imposes tax on an amount that is only a proxy for, but not actually, income attributable to IP.

You read that right.  The surprising twist to the arguably practical notion of imposing a minimum tax on income from easy-to-relocate intangibles is that the tax is imposed on an amount that is not actually the business’s IP income.  Instead it is imposed on a proxy that turns out to be particularly harsh for services-heavy firms, even those that earn relatively little income from IP.  Because of this, some opponents are framing it as a dangerous new tax.³⁴

The inherent mobility of IP is one factor in profit shifting.  But the difficulty in calculating how much income is rightfully allocated to IP—an issue that quickly becomes contentious given how much money can be at stake—is another major challenge faced by tax writers charged with defending the corporate income tax base.  These subjective allocations are frequently the focus of high-stakes controversies between the IRS and U.S. multinationals.

That’s why FBCII is not defined as intangible income earned by a foreign subsidiary.  Instead, with some exceptions, FBCII equals whatever portion of the foreign subsidiary’s gross income exceeds 10 percent of its adjusted basis in depreciable tangible property (its investment in physical business assets such as office buildings in the foreign jurisdiction).

What does investment in office buildings have to do with intangible income?  Nothing.  But tax writers decided they needed a formula rather than struggling with a facts and circumstances analysis.  They decided on a portion of qualified business asset investment.³⁵

The proxy puts certain firms at a clear disadvantage.  While companies that own a lot of depreciable tangible property with a high adjusted basis in a foreign jurisdiction favor the proxy, companies that heavily invest abroad in personnel and not property (like services firms) do not.  At the margin, this will incentivize firms with foreign income to own tangible property in a foreign jurisdiction, rather than lease it, for example.

The TIE Coalition wrote to the Senate Finance Committee in 2015 expressing its displeasure with the proposal.³⁶It did not like the idea of “increased and uneven taxation of foreign-affiliate IP income” and noted that the formula “would tend to dampen investment in tangible property in the United States by U.S.-based multinational companies,” because such firms often locate their IP abroad and would therefore be incentivized under the FBCII formula or proxy to invest in tangible property abroad.

The coalition was explicit in its opposition to Option C.  “The likely outcome of using ‘Option C’ as proposed in the Camp legislation would be to increase corporate inversions and incentives for foreign acquisitions of U.S. based IP intensive companies.” The group added that IP income should not be “singled out for harsher tax treatment than income from other assets.”³⁷

Making the Politics and the Math Work

Given the reaction from groups like the TIE Coalition to the 2014 version of Option C, one might think that lawmakers would be prepared to water down the base erosion measure.  We are hearing the opposite may be true.  While tax writers could tweak the proxy for FBCII, ³⁸ they are also reportedly considering—at least as one of many options on the table—potentially appeasing the anti-competitiveness concerns of U.S. multinationals³⁹by levying a new tax on foreign-parented firms that sell into the United States.⁴⁰ Sound familiar?  This also has a hint of BAT-like consumption-based taxation.

While it is too soon to tell if such a new tax will really come to fruition, particularly because it would likely implicate World Trade Organization compliance concerns, nothing (except for the actual BAT) is off the table.

Recall that lawmakers need to come up with as much as $225 billion worth of international revenue raisers to pay for territorial.  Although JCT has not put out an updated score on the cost of moving to territorial—either by way of a 95-percent or a 100-percent exemption of dividends paid by foreign affiliates—the thinking is that it will likely cost less than $225 billion, which is what JCT estimated for Camp’s 95-percent exemption from 2014 through 2023.⁴¹

The Tax Policy Center (TPC) and Tax Foundation estimated a move to territorial would cost $87.9 billion or $160 billion, respectively, with TPC suggesting that territorial would actually cost more in the second decade than in the first (increasing by nearly 60 percent to $139.2 billion).⁴²

According to JCT’s most recent estimate of Camp’s Option C, the measure would only cover about $115 billion of the cost of a move to territorial.  It is possible that macroeconomic changes will have the effect of causing Camp’s Option C to raise more revenue today.  However, if that is not the case and absent other international revenue raisers (Option C was the biggest by far), Congress could need another $110 billion to make the math work.

Alternatively, if the cost of territorial is on the low side and the revenue gained from anti-base erosion measures turns out to be higher, a gentler version of Option C may be enough to make the math work.  While JCT holds the answers, if the math gets too difficult, lawmakers may abandon their goal of paying for international tax reform exclusively with international revenue raisers.  Instead, they could steal money from general business base broadeners like limiting interest deductibility and lengthening depreciation schedules.

While many on Wall Street may be getting impatient with the repeated promises and little action from lawmakers on tax reform, staffers for the tax writing committees have been feverishly working behind-the-scenes to craft these very technical provisions in advance of what is shaping up to be a very busy fall.

Critical deadlines—including September 29, when Treasury expects the government will hit the debt ceiling⁴³; September 30, when the Federal Aviation Administration’s authority and funding will expire⁴⁴; and October 1, when Congress must pass a so-called “cromnibus” package that consists of a continuing resolution and an omnibus of 12 appropriations bills to fund much of the government at the start of the new fiscal year ⁴⁵ will likely take the attention away from tax reform when lawmakers return from summer recess September 5.  In addition, it is unlikely that any tough calls on tax reform will be made before Congress passes a budget resolution, which reportedly may not happen until October. ⁴⁶ 

In the meantime, traders should pay close attention to efforts by business groups to influence the shape of tax changes.  For instance, on August 10, more than 50 such groups sent a letter to Treasury Secretary Steven Mnuchin asking that if a deemed repatriation is enacted as part of a move to territorial, companies be allowed a period of at least eight years with no interest charge to pay the new tax.⁴⁷  Traders should also keep a close eye out for reports of any details on possible international anti-base erosion measures, as such measures will likely water down any benefit expected from tax reform, particularly for many pharma and tech multinationals.

One or more authors may have positions in stocks of companies referred to in this article.

^{[1] See also our April 27 report “Gauging the Relative Winners and Losers of Trump’s Move to a Territorial System of International Taxation.”}

^{[2] See the July 27, 2017, joint statement on tax reform, majority tax writers from the House, Senate, Treasury, and the National Economic Council:  https://waysandmeans.house.gov/joint-statement-tax-reform.}

^{[3] See the score for “establishment of exemption system” in JCX-98-15, June 24, 2015, https://waysandmeans.house.gov/wp- content/uploads/2015/06/2015-06-24-SRM-Barthold-Testimony.pdf.  While we understand this number may be lower today, there are no updated figures on the cost of territorial from JCT that are publicly accessible.}

^{[4] https://waysandmeans.house.gov/wp-content/uploads/2015/06/2015-06-24-SRM-Barthold-Testimony.pdf.}

^{[5] http://www.tiecoalition.com/wp-content/uploads/2016/03/Statement_WaysMeansCommittee.pdf.}

^{[6] Sullivan, Martin A., March 24, 2014, “Spotlight on Camp:  Economic Analysis:  Camp’s Approach Treats Most CFC Income as Intangible,” Tax Notes (Doc 2014-6660).}

^{[7] March 2017, “International Comparisons of Corporate Income Tax Rates,” Congressional Budget Office (https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52419-internationaltaxratecomp.pdf).}

^{[8] The TIE Coalition (www.tiecoalition.com) is focused on ensuring “that the U.S. tax code does not discriminate against any particular industry or type of income—including income from intangible property.”}

^{[9] McKeon, Jessica, August 14, 2017, “Indefinitely Reinvested Foreign Earnings Still Climbing,” Audit Analytics (http://www.auditanalytics.com/blog/indefinitely-reinvested-foreign-earnings-still-climbing/).}

^{[10] Parker, Alex M., June 29, 2017, “Tech, Pharma Brace for Fight Over Tax Proposals on IP Income,” Bloomberg BNA Daily Tax Report, quoting David Lewis, vice president for global taxes at Eli Lilly and Co., who said that Option C’s round-trip rule would put U.S.-headquartered companies at a disadvantage, especially relating to corporate takeovers.  “You’re creating a merger and acquisition disadvantage.  If we are trying to acquire a foreign-headquartered biotech company, we’re going to have to price into the acquisition the fact that we’re going to pay full taxes on any income they have in the U.S. market.  Our foreign competitors aren’t going to have to price that in,” Lewis told Bloomberg BNA.  “It makes it very hard to win those competitions.” And see Elliott, Amy S., November 9, 2015, “Minimum Tax Would Make U.S. Inversion Problem Worse, Observers Warn,” Tax Notes (Doc 2015-24681).}

^{[11] “Under an exemption system, foreign subsidiary corporations would be tax exempt . . . and because the exemption would be permanent rather than temporary, its import for firms’ tax planners would be magnified.  Accordingly, the tax system’s transfer pricing rules for allocating income among U.S. parent firms and their foreign subsidiaries would become more important; more pressure would apply to rules that are inherently difficult to enforce.” Jane G. Gravelle, July 21, 2017, “Reform of U.S. International Taxation:  Alternatives,” Congressional Research Service (Doc 2017-64273).}

^{[12] Technically, the Byrd Rule applies not provision-by-provision, but on net looking at the whole legislative title.  See our May 22 report “A Trader’s Guide to the Budget Process Necessary to Achieve Substantial Business Tax Cuts.” Based on what we are hearing, there is some chance that the international reforms to the tax system will be included in their own title in tax reform legislation.  The Byrd Rule provides that any increased outlays or decreased revenues “during a fiscal year after the fiscal years covered by such reconciliation bill [cannot be] greater than outlay reductions or revenue increases resulting from other provisions in such title,” according to 2 U.S.C. §644.  In addition, the draft budget resolution that would govern tax reform legislation (H. Con. Res. 71, https://www.congress.gov/115/bills/hconres71/BILLS-115hconres71rh.pdf) provides that the scores from the Congressional Budget Office and the Joint Committee on Taxation, which will take into account macroeconomic effects, shall cover the 20-year period following the budget window (see Section 307).}

^{[13] http://www.gallup.com/poll/208685/majority-say-wealthy-americans-corporations-taxed-little.aspx.}

^{[14] See totals for individual compared to corporate on page 1357 of http://www.jct.gov/jcs-10-87.pdf.}

^{[15] https://www.jct.gov/publications.html?func=download&id=4562&chk=4562&no_html=1.}

^{[16] Pomerleau, Kyle, 2016, Details and Analysis of the 2016 House Republican Tax Reform Plan, Tax Foundation (http://taxfoundation.org/article/details-and-analysis-2016-house-republican-tax-reform-plan); and James R. Nunns, Leonard E. Burman, Jeffrey Rohaly, Joseph Rosenberg, Benjamin R. Page, 2016, An Analysis of the House GOP Tax Plan, The Tax Policy Center (http://www.taxpolicycenter.org/publications/analysis-house-gop-tax-plan/full).}

^{[17] https://www.finance.senate.gov/chairmans-news/hatch-shift-from-worldwide-to-territorial-tax-system-has-bipartisan- support.}

^{[18] https://budget.house.gov/wp-content/uploads/2017/07/HCR_budget_2018_RH_outofcommittee.pdf.}

^{[19] While one recent report indicated that a move to territorial could involve a U.S. tax on overseas IP of only about 8 or 9 percent (likely taking into account a kick-out), we think a 10 percent to 12.5 percent rate is more likely.  See Patti Domm, July 13, 2017, “Tax reform and tax cuts are coming even if health-care bill fails — political strategists,” CNBC (http://www.cnbc.com/2017/07/13/tax-reform-and-tax-cuts-are-coming-even-if-health-care-bill-fails---strategists.html).}

^{[20] See Sec. 4211 “Foreign intangible income subject to taxation at reduced rate; Intangible income treated as subpart F income,” which amends Section 954, among others, and creates new Section 250 “Foreign intangible income,” described in JCS-1-14, https://www.jct.gov/publications.html?func=download&id=4674&chk=4674&no_html=1.  Note that a similar sourcing rule is provided for services.}

^{[21] Parker, Alex M., July 10, 2017, “Global Minimum Tax Re-Emerges in U.S. Tax Reform Debate,” Bloomberg BNA Daily Tax Report (https://www.bna.com/global-minimum-tax-n73014461534/).}

^{[22] In a joint statement on tax reform issued July 27, tax writers in the House, Senate, Treasury and White House indicated that they are prioritizing permanent changes to the tax code.  (https://waysandmeans.house.gov/joint-statement-tax-reform/)}

^{[23] Both Camp and House Republicans’ “A Better Way” Blueprint for tax reform suggested that accumulated foreign earnings in liquid form (cash or cash equivalents) would be taxed at 8.75 percent, and any remaining more illiquid earnings would be taxed at 3.5 percent, which likely would be payable in installments over several years (but within the 10 year budget window).}

^{[24] McKeon, Jessica, August 14, 2017, “Indefinitely Reinvested Foreign Earnings Still Climbing,” Audit Analytics (http://www.auditanalytics.com/blog/indefinitely-reinvested-foreign-earnings-still-climbing/).}

^{[25] “Comprehensive tax reform could spur a frenzy of mergers and acquisitions if Congress is able to push a bill through in the coming months, the chief executive officer of Waste Connections Inc. said.  If there is material tax reform ‘you will see not just in our sector but others, a true M&A bonanza over the two-and-a-half to three-year period before the next election,’ Ronald J. Mittelstaedt, head of the waste-hauling company, told investors in a July 26 conference call” according to Laura Davison, July 27, 2017, “Hill Briefs:  Merger Frenzy Possible; Reinsurers and Border Tax,” Bloomberg BNA Daily Tax Report.}

^{[26] Cox, Jeff, July 13, 2017, “Companies have big plans for trillions in overseas cash—if tax reform ever happens,” CNBC (http://www.cnbc.com/2017/07/13/companies-have-big-plans-foroverseas-cash--if-tax-reform-ever-happens.html).}

^{[27] As of June 30, 2017, Microsoft had $127.9 billion that would be impacted by a deemed repatriation.  (https://www.sec.gov/Archives/edgar/data/789019/000156459017014900/msft-10k_20170630.htm)}

^{[28] As of December 31, 2016, Merck had between $11.4 billion and $12.9 billion that would be impacted by a deemed repatriation.  (https://www.sec.gov/Archives/edgar/data/310158/000031015817000010/mrk1231201610k.htm)}

^{[29] A quick primer on how the taxation of IP income works today:  Assume a product contains IP (the technology used to make it is patented, for example).  If a controlled foreign corporation (CFC) supervises the manufacture of the product by an unrelated contract manufacturer outside the United States, income from the sale of the product (even for U.S. consumption) allocated to the IP may not be subpart F income under current law, meaning the CFC’s IP profits may not be taxed currently in the United States as long as the proceeds are not repatriated.  See https://www.law.georgetown.edu/academics/centers- institutes/iiel/taxation-of-ip/archive/2016/upload/Paul-Oosterhuis-Presentation-3-11-16.pdf .}

^{[30] Ogier, John P., February 2016, “Intellectual property, finance and economic development,” WIPO Magazine (www.wipo.int/wipo_magazine/en/2016/01/article_0002.html).}

^{[31] The Camp tax rate on income from foreign intangibles—specifically foreign base company intangible income—was defined as a percentage of the maximum corporate income tax rate.  Fully phased in, the proposal would be 60 percent of the top corporate rate proposed by Camp of 25 percent, which equals 15 percent.}

^{[32] http://www.cnbc.com/2017/07/13/tax-reform-and-tax-cuts-are-coming-even-if-health-care-bill-fails---strategists.html.}

^{[33] In 1998, one of the authors proposed a minimum deemed distribution regime that would repeal the portion of the Subpart F rules that relate to active foreign income.  See Stuart Leblang, December 14, 1998, “Deferred Gratification:  A More Rational Approach for Taxing Multinationals,” Tax Notes (Doc 98-36753).}

^{[34] Jagoda, Naomi, July 17, 2017, “Koch-backed group:  Congress shouldn’t propose new foreign tax,” The Hill (http://thehill.com/policy/finance/342346-koch-backed-group-congress-shouldnt-propose-foreign-minimum-tax).}

^{[35] Velarde, Andrew, October 22, 2014, “U.S. Tax Reform Draft Provisions for CFCs Could Be Fleshed Out,” Tax Notes (Doc 2014-25297).}

^{[36] https://www.finance.senate.gov/imo/media/doc/Tax%20Innovation%20Equality%20Coalition%20(TIE%20Coalition).pdf .}

^{[37] See http://www.tiecoalition.com/wp-content/uploads/2016/03/Statement_WaysMeansCommittee.pdf and see https://morningconsult.com/opinions/congress-shouldnt-discriminate-against-the-intangibles-in-tax-reform/, linked to from the TIE Coalition website, where tech CEO Alan Baratz wrote May 21, 2015, that “the tax reform proposals in former House Ways and Means Chairman Dave Camp’s Discussion Draft, the Tax Reform Act of 2014, seriously threaten the wide-ranging contributions of intangible property.  Foreign-based companies would have a major advantage over U.S. companies who compete globally, resulting in significantly more inversions of these companies.  The effects on our country’s innovative technological companies and groundbreaking biopharmaceutical companies would be devastating.”}

^{[38] Sean Hailey, an adviser for the majority on Ways and Means, said that the formula-based approach to defining FBCII “reflects an ‘economist’s view’ of what intangible assets would be, but that it could be fine-tuned to more closely identify intangible returns that are involved in profit shifting or base erosion.” See Alex M. Parker, October 22, 2014, “Staffers:  Lack of Intangibles Definition In Camp Draft Reflects Taxpayer Concerns,” Bloomberg BNA Daily Tax Report.}

^{[39] https://www.uschamber.com/letter/comment-letter-tax-reform-chairman-hatch.}

^{[40] Tony Coughlan, tax counsel for the Senate Finance Committee, . . . said he has also heard suggestions that a territorial system, which exempts foreign income from U.S. taxation, should also . . . [deny] deductions related to foreign income [to] act as a measure against base erosion by reducing the incentive for companies to earn money offshore.” Alex M. Parker, June 7, 2017, “Base Erosion Fixes in Tax Reform Mix:  GOP Staffer,” Bloomberg BNA Daily Tax Report (https://www.bna.com/base- erosion-fixes-n73014453004/) .}

^{[41] https://waysandmeans.house.gov/wp-content/uploads/2015/06/2015-06-24-SRM-Barthold-Testimony.pdf.}

^{[42] Pomerleau, Kyle, 2016, Details and Analysis of the 2016 House Republican Tax Reform Plan, Tax Foundation (http://taxfoundation.org/article/details-and-analysis-2016-house-republican-tax-reform-plan); and James R. Nunns, Leonard E. Burman, Jeffrey Rohaly, Joseph Rosenberg, Benjamin R. Page, 2016, An Analysis of the House GOP Tax Plan, The Tax Policy Center (http://www.taxpolicycenter.org/publications/analysis-house-gop-tax-plan/full).}

^{[43] http://thehill.com/policy/finance/346262-looming-debt-limit-fight-rattles-wall-street.}

^{[44] https://www.faa.gov/about/reauthorization/.}

^{[45] https://www.bna.com/no-deals-sight-n73014463145/.}

^{[46] Elis, Niv, August 10, 2017, “Senate panel might not take up budget until October,” The Hill (http://thehill.com/policy/finance/346068-senate-panel-might-not-take-up-budget-until-october).}

^{[47] August 10, 2017, “Business Groups Call for Two Repatriation Rates,” Tax Notes (Doc 2017-65920).}