Camp Tax Plan May Deal Winning Hand to Dual Capacity Taxpayers

Published in Bloomberg BNA Daily Tax Report

By Marc Heller

March 7 — A proposal by House Ways and Means Committee Chairman Dave Camp (R-Mich) to ditch the U.S. worldwide tax system could be a safe bet for MGM Resorts International.

By revamping the way the U.S. taxes foreign income, Camp would head off attempts by the Obama administration to levy heftier taxes on so-called dual capacity taxpayers such as multinational casinos or energy companies that reap specific economic benefits from other countries.

Camp’s plan isn’t painless. Companies would lose some ability to claim foreign tax credits and be open to double taxation on up to 5 percent of foreign income returned to the U.S. in the form of dividends, lobbyists following the issue told Bloomberg BNA. Camp released the draft Feb. 26 (39 DTR GG-4, 2/27/14).

Lobbyists said MGM Resorts’ casino and hotel in Macau is one example of a venture that can lead companies into the world of dual capacity taxation. Gaming companies benefit from access to countries’ gaming markets, just as an oil company would benefit from access to a foreign pipeline, for instance, they said.

Companies typically pay for access to foreign markets—as in royalties paid by oil and gas companies that extract natural resources—and the U.S. tax code dictates whether such payments may be offset by foreign tax credits. Royalties aren’t considered taxes, although the nature of a company’s payments is open to interpretation.

‘Pretty Small Tax.’

Corporations affected by Camp’s proposal figure the added tax vulnerability is a fair price to pay for assurances that much costlier proposals Democrats have repeatedly floated will be put to rest, lobbyists and tax policy analysts said.

“It’s a pretty small tax,” Margo Thorning, senior vice president and senior economist at the American Council for Capital Formation, told Bloomberg BNA March 6. At a top rate of 25 percent on no more than 5 percent of income, the tax amounts to 1.25 percent, she said.

Reached for comment, MGM Resorts referred Bloomberg BNA to the American Gaming Association, which represents MGM and other gaming resort operators. The AGA has followed the dual capacity issue but hasn’t taken an official position, the organization said. Dual capacity rules also affect Sands, with casinos in Macau and Singapore, an advocate for the gaming industry told Bloomberg BNA.

In his comprehensive tax overhaul draft released Feb. 26, Camp proposed to replace the U.S.’s worldwide-type tax system with a more territorial regime and to revamp the rules surrounding foreign tax credits. The proposal is designed to encourage companies to send more of their foreign-earned income to the U.S., where it could be used for business expansion.

Sharply lower tax rates would benefit corporations, knocking the top levy from 35 percent to 25 percent. A total of 95 percent of corporate foreign dividends paid to U.S. shareholders would be free from taxation.

“We’re willing to pay a little more under his system,” said Brian Johnson, director of federal relations at the American Petroleum Institute. “I think the chairman got the vast majority of this right.”

API Sees Other Flaws

Camp’s international provisions aren’t perfect, Johnson said. The API is taking a closer look at details related to Subpart F income, and the organization said Camp’s proposals to repeal last-in, first-out inventory accounting rules and lengthen depreciation periods for property are “serious flaws.”

Rep. Kevin Brady (R-Texas), a senior member of the Ways and Means Committee, told reporters Feb. 28 that, while the tax overhaul’s tilt toward a territorial system and lower tax rates is generally good news for energy companies, the draft may have fallen short on the dual capacity issue.

“I’m not sure we got it exactly right there,” Brady said, without elaborating. A spokeswoman later told Bloomberg BNA that Brady is concerned that the draft doesn’t make the dual capacity issue entirely moot and that he wants to learn more about the effects.

Obama Proposal Limits

The Obama administration’s proposal, made each year since 2010, would limit dual capacity taxpayers’ use of the foreign tax credit, raising as much as $11 billion over a decade, the Treasury Department said. Companies would be able to take the credit only up to the generally applicable rate of a foreign country’s corporate tax, which in some countries is sharply less than the actual amount companies pay.

That is because some countries tack on an additional levy that isn’t technically considered a tax and, under the administration’s proposal, can’t be offset by the foreign tax credit, Johnson said. In Norway, for instance, companies pay an additional levy of 50 percent for oil and gas extraction, which the Obama administration doesn’t count toward the foreign tax credit, he said.

In addition, the administration has proposed changes to the way taxpayers may demonstrate that the payments they made to a foreign government were taxes, rather than royalties or other compensation for a specific economic benefit.
Camp’s proposal makes that issue mostly moot, one lobbyist said, but any industry with much intangible income—such as electronics—sees a bigger tax bite because foreign intangible income would become subject to a 15 percent tax under Camp’s plan.

If the administration’s proposal were to become law, Johnson said, U.S.-based oil and gas companies would be less competitive, bidding on fewer foreign contracts.

How far Camp’s draft proposal goes is unclear. He has yet to introduce legislation and told reporters the week of March 3 that he will probably conduct a hearing on the tax overhaul. The international provisions resemble earlier proposals by Camp, so he hasn’t shown much inclination to change direction.

In the Senate, Finance Committee Chairman Ron Wyden (D-Ore.) has proposed rolling back some of the foreign tax credit benefit to large, integrated oil companies that are dual capacity taxpayers, including in the tax overhaul bill he introduced with former Sen. Judd Gregg (R-N.H.) in 2010 (35 DTR G-11, 2/24/10).

Wyden has also called for corporate tax rate reductions slightly deeper than Camp’s, topping out at 24 percent. He supports staying with a worldwide tax approach.