The House Ways and Means Select Revenue Measures Subcommittee held a hearing to consider a move to a territorial corporate tax system that would tax only the income earned inside the U.S.

Such a system is gaining support in Congress amid a lobbying effort by a group of multinational U.S.-based corporations for a “tax holiday” to allow approximately $1 trillion in foreign earnings to be repatriated at a low tax rate. The move could have a significant impact on how much money multinational corporations have to pay in taxes and on the tax deferral and transfer pricing strategies that they employ.

The Subcommittee on Select Revenue Measures held a hearing Thursday with a panel of tax practitioners, tax attorneys and tax experts in an effort to elicit comments and analysis of the committee’s international tax reform discussion draft, which was recently introduced by Ways and Means Chairman Dave Camp, R-Mich. The draft is designed to transition the United States from a worldwide to a territorial system of taxation and eliminate the so-called “double taxation” that U.S.-based companies face when bringing profits earned abroad back home (see Congressional Republicans Propose International Tax Reforms).

During the hearing, witnesses praised the discussion draft as a catalyst for much-needed reform to make America a more competitive, attractive place to invest and hire more workers.

“A participation exemption system is a more competitive alternative to the current U.S. regime that imposes a residual level of U.S. tax on the remittance of foreign earnings back to the United States,” said Deloitte Tax LLP partner Tim Tuerff. “An exemption system facilitates the ability of U.S. companies to address the needs of foreign markets while retaining support operations in the United States. Under this system, funds may be earned outside the United States and remitted to the United States to pay for research and development and corporate headquarters expenses.”

“I believe that the discussion draft’s participation exemption system is a fundamentally sound starting point,” said John Harrington, a partner at the law firm SNR Denton. “In particular, I commend its use of the participation exemption system used by many other countries as a base, rather than creating a new territorial system out of whole cloth.”

Subcommittee ranking member Richard Neal, D-Mass., said he saw some value in the proposals, but he still had questions. “If there’s one thing I think we can all agree on, it’s that our corporate and international tax rules need to be reformed,” he said. “The United States has one of the highest statutory corporate tax rates in the world, which many economists say acts as a barrier to domestic investment. We’ve also heard a lot about the so-called ‘lockout effect’ of the high corporate tax rate—where U.S. multinational companies don’t bring their earnings home to the United States because of the repatriation tax. At the same time, our current system includes loopholes which allow companies to shift income from the United States to low tax or no tax jurisdictions.”

However, he wondered about the impact of the proposal on purely domestic companies and small businesses, and whether the proposal would encourage investment and job creation in the U.S. Opponents of the repatriation tax holiday argue that the last time it was tried, in 2004, it did little to generate new jobs in the U.S., with most of the money going toward stock buybacks and dividends.

“Although I think lowering our corporate tax rate on a revenue neutral basis is a worthy goal, can we lower the corporate tax rate to 25 percent without eliminating important tax incentives that benefit job creation and investment in the United States, like the R&D tax credit?” Neal said.

Subcommittee chairman Pat Tiberi, R-Ohio, encouraged practitioners, businesses, academics and other interested parties to share their feedback on the proposal for a territorial tax system for corporations by visiting the “comprehensive tax reform” section of the Ways & Means Committee website. “I want to emphasize that comprehensive tax reform remains our goal,” he said. “By the time we are finished, we will have reformed the Tax Code for corporations, pass-throughs and individuals.”

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