International tax reform efforts on hold for now, but taxpayer vigilance still advised

A White House official indicated in a recent Wall Street Journal article that action on significant international tax reform will be on hold until next year as the Obama administration and Congress focus on health care reform legislation (Neil King Jr. and Elizabeth Williamson. "Business Fends Off Tax Hit – Obama Administration Shelves Plan to Change How U.S. Treats Overseas Profits," The Wall Street Journal, Oct. 13, 2009).

This development is not surprising. The $210 billion in international tax reform proposals included in the FY 2010 budget package President Obama released in May would significantly expand the reach of the federal tax code and raise the cost of doing business in the United States. Getting them enacted into law in 2009 would be difficult, given lawmakers' current focus on health care and climate change legislation.


Prospects for 2009

But even though broad-based international reform is off the table for now, taxpayers should still be alert to the possibility of targeted action in the international arena this year. The most likely opportunities for action include:

- Health Care – Sen. Carl Levin, D-Mich., has stated that he intends to introduce his international tax bill, the Stop Tax Haven Abuse Act (S. 506), as an offset when health care legislation reaches the Senate floor.

- Extenders – Congress is likely to act by the end of this year to extend a number of popular tax provisions (such as the research and experimentation credit, the subpart F exception for active financing income, and 15-year cost recovery for qualified leasehold and restaurant improvements) that are set to expire in 2009. Congressional staff members have suggested that certain international tax provisions could be used as revenue offsets to bankroll extenders legislation. Moreover, although the president has proposed extending the lookthrough rule for controlled foreign corporations for one year, its inclusion in an extenders package is not guaranteed.

We also could see additional recommendations, if not concrete proposals, for international tax reform when the Tax Reform Commission headed by former Federal Reserve Board Chairman Paul Volcker releases its report this year. (The report is scheduled to be released in early December, but given the lack of significant activity by the commission so far, this timing is not assured.)


Prospects for 2010 and 2011

As we look ahead, it is clear that the Obama administration will continue to need significant revenue to meet its budgetary goals for 2011 and later years and will likely revisit its international tax proposals. Consequently, the debate regarding the U.S. taxation of companies' foreign income, including issues such as the scope of deferral, the operation of the current rules, and the possibility of adopting a territorial system, will continue.

Many companies are currently in the process of restructuring their businesses in response to the global economic downturn. Such planning and restructuring should continue; however, it is prudent to consider alternatives that take into account legislative proposals for international tax reform. Notwithstanding the lack of momentum for significant international tax reform in 2009, companies must continue to closely monitor the legislative process now and into 2010.