Overseas Profits: When a 95% Tax Cut Doesn't Cut It

Under current law, American companies pay a 35 percent U.S. tax on profits they earn abroad. They get credits for tax payments to foreign governments and don’t pay the U.S. anything until they bring the money home. House Ways and Means Committee Chairman Dave Camp (R-Mich.), the top Republican tax-writer in Congress, wants to give businesses an exemption on 95 percent of that foreign income. In exchange, Camp’s proposal would make it less enticing for companies to shift profits—particularly from intangible assets such as patents and trademarks—into tax havens such as Bermuda, as Google, Cisco Systems, and Forest Laboratories do using strategies with nicknames like “double Irish” and “Dutch sandwich.”

Under one option Camp is weighing, companies would have to pay at least 10 percent in foreign taxes to qualify for the break. Another idea: If a company isn’t paying a foreign country at least 13.5 percent in taxes on intangible assets, the company would have to pay the U.S. enough to bring its total rate up to 15 percent, even if it doesn’t repatriate the money. In a third scenario, adapted from a White House proposal, a company’s “excess” (to be defined by Washington) profits on overseas intangible assets would get hit at a 25 percent rate.