On the last page of a nine-page tax plan that calls for slashing business rates, President Donald Trump and congressional Republicans proposed a little-noticed tax that may hit companies like Apple and Pfizer.

It's contained in one sentence: "To prevent companies from shifting profits to tax havens, the framework includes rules to protect the US tax base by taxing at a reduced rate and on a global basis the foreign profits of US multinational corporations." The rate and formula aren't specified, but that lone sentence carries multibillion-dollar implications for multinationals. Their lobbyists are noticing.

Proposing a new tax on US companies' foreign profits "is appalling," said Ken Kies of Federal Policy Group, whose clients include General Electric and Microsoft. "The whole point of this tax reform was to make US corporations more competitive. It's going to do the opposite."

Trump and congressional leaders buoyed US stocks and seized national attention last week as they released a broad tax plan that would cut the corporate rate to 20 per cent from 35 per cent while also cutting rates for pass-through businesses and individuals. Details of those proposals remain sketchy -- but there's even less clarity around the plan for revamping international corporate taxes. As specifics begin to emerge, including at a Senate Finance Committee hearing Tuesday, opposition may increase.


It's not all bad news for multinationals. On the positive side, the framework would allow them to bring back to the US, or repatriate, years' worth of foreign earnings after paying a low tax rate -- perhaps 10 per cent --on them.

And even the new minimum foreign tax might not be as bad as it could have been. Four tax experts told Bloomberg News the framework's wording suggests that despite the tax's goal, multinationals will be able to keep using sophisticated tax-winnowing techniques and tax havens. While they may still face billions of dollars in new tax payments, it won't be as bad as it could have been for them thanks to one word in the framework's language: "global."

Trump and Congress haven't specified the minimum rate.

One number batted around in recent weeks is 10 per cent, said Kathleen Ferrell, a tax partner at law firm Davis Polk. Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center and a former tax partner at Ropes & Gray, said that 15 per cent might be more likely.

It's also unclear from the brief description in the framework how the tax would work. But here's a general idea: Congress would set a low tax rate -- say 15 per cent -- that would serve as a minimum rate for companies on their offshore subsidiaries' earnings. Any multinational that paid more than that minimum to foreign governments wouldn't owe the tax in the US But if a company's overseas taxes fell below the minimum -- a sign that it made heavy use of tax havens -- the company would pay the US the difference.

But because the framework says the new tax would apply "on a global basis," it won't be as tough on companies as it might have been -- or as past Republican tax proposals have been, experts said.

"Companies will double down on tax-planning technologies to create a stream of zero-tax income that brings their average down to that minimum rate," said Edward Kleinbard, a tax law professor and former chief of staff for Congress's Joint Committee on Taxation.

The word "global" means that the minimum tax would be calculated worldwide -- an aggregate approach that would account for high-tax countries like Germany along with tax havens. In 2014, former Representative Dave Camp, a Michigan Republican, had recommended using a "country-by-country" approach, levying the minimum foreign tax in each case where a company used a tax haven.

The difference is significant. Say a company reports US$100 (NZ$139) of pretax profit through a subsidiary in Bermuda, which has no corporate tax, and US$100 (NZ$139) through a subsidiary in India, where the rate for foreign companies is 40 per cent. That's a global average rate of 20 per cent -- above the potential 15 per cent at which the new minimum tax would kick in. So under a global approach, the company wouldn't owe any minimum foreign tax in the US By contrast, on a country-by-country basis, the company would owe US$15 (NZ$21) on the Bermuda profits.

Economist Douglas Holtz-Eakin, an adviser to the Alliance for Competitive Taxation, whose members include Eli Lily & Co, Exxon Mobil, General Electric and Google, said companies "firmly oppose" the tax.

Kevin Smith, a spokesman for Senator Rob Portman, an Ohio Republican who's a member of the tax-writing Senate Finance Committee, told Bloomberg News over the weekend that the minimum foreign tax would use a global approach. But it's not clear whether the House Ways and Means Committee will agree -- or whether the tax will be the subject of a congressional fight. Ways and Means spokeswoman Emily Schillinger declined to comment.

What's clear is that the global approach "creates a perverse incentive" to keep engaging in the very profit shifting it aims to curtail, said economist Kimberly Clausing of Reed College.

Robert Pozen, a senior Brookings Institution fellow who is the former chairman of MFS Investment Management and the former president of Fidelity Management & Research Company, argued that Trump's approach -- which he called "modified territoriality" -- would prevent offshore profit shifting that would arise in a pure territorial system that doesn't tax any foreign earnings.

Currently the US taxes corporate profits worldwide, no matter where they're earned. That approach -- which makes America unique among developed nations -- comes with a large asterisk: Companies can defer paying tax on their overseas earnings until they return that income to the US, a process known as repatriation. The repatriation quirk has prompted tax-avoidant US companies to shift their profit to low-tax countries and leave an estimated US$2.6 trillion (NZ$3.6t) in earnings offshore.

The Institute on Taxation and Economic Policy reported in a 2016 study that 73 per cent of Fortune 500 companies have at least one subsidiary in tax haven countries. Of those, some 58 per cent of companies use at least one unit in Bermuda or the Cayman Islands.

A spokesman for the largest of those companies, Apple, didn't respond to requests for comment. Last year, the European Commission ordered Apple to pay as much as 13 billion euros plus interest, alleging that Ireland had illegally slashed the iPhone maker's tax bill. Ireland taxes companies at 12.5 per cent but allowed Apple to pay an effective corporate tax rate of 1 per cent on its European profits in 2003 -- down to 0.005 per cent in 2014, according to EU Competition Commissioner Margrethe Vestager. The company has challenged the commission's figures and is appealing its finding.

Joan Campion, a spokeswoman for another company on the ITEP list, Pfizer, said last week that "we are evaluating the document and look forward to further details on the proposal." A spokesman for Microsoft, which also appeared on the list, declined to comment.

The framework that Trump and congressional leaders rolled out last week would change the international taxation in two main ways: First, it would move away from the worldwide global approach closer to a "territorial" one, focusing on the companies' American income. Second, it would impose a "deemed," or mandatory, repatriation tax on all the stockpiled profits offshore. The specific repatriation rates -- one for earnings held as cash and another for earnings held in other assets -- weren't included in the published framework.

Gary Cohn, the director of the National Economic Council, said Sunday that the administration wants the repatriation rate set in the "10 per cent range," but didn't specify whether that would be for cash or non-cash holdings.

Setting the repatriation rates low enough would be a boon for pharmaceutical and tech companies. Both industries have large amounts of profit stashed overseas. But moving toward a territorial system would give companies additional incentives to move earnings offshore to havens and keep them there untaxed. For example, neither Bermuda nor the Cayman Islands imposes corporate taxes.

The minimum foreign tax is aimed at preventing such so-called "base erosion."