How 'territorial' taxing of US foreign profit might work

US taxes

Many large corporations want the US government to adopt a "territorial system" that would exempt their active overseas corporate profits from US taxes, in whole or in part.

John Engler, head of the Business Roundtable, a group that lobbies for corporate chief executives, said on Thursday that President Barack Obama might back such a change. A White House spokesman responded by saying that Obama "does not believe that a pure territorial system is the best way" to reduce corporate taxes.

That comment left the door open to something less than a "pure" system, perhaps one that resembles systems in place in other countries that exempt only some overseas profits.

Opponents say alternatives should be considered, however, such as repealing a law that lets companies defer payment of taxes on foreign profits and making those profits subject to immediate taxation, just like US domestic profits.

Here is a look at the current law on taxing international profits of corporations and some reform proposals.

CURRENT LAW. The top US corporate income tax rate is 35 percent. Profits earned in the United States are taxed at that rate on a current basis, meaning right away.

Most foreign profits are not taxed on a current basis because of another law that allows income tax to be deferred on overseas profits as long as they are not brought into the United States. Corporations with overseas profits must pay tax on them to the host country where they are booked. But as long as those profits stay outside the United States, no US tax is due.

As a result, more than $1.5 trillion in corporate profits is estimated to be parked overseas avoiding US tax. Much of these unrepatriated profits belong to large technology and drug firms.

TERRITORIAL SYSTEM. This proposal would exempt active overseas profits from US taxes.

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