Inside U.S. Trade
June 18, 2010
Bond, Thune Spearhead Efforts To Gut Foreign Tax Provisions From Bill
Vol. 28 No. 24
by Erik Wasson
Sens. Kit Bond (R-MO) and John Thune (R-SD) have emerged as champions of multinational firms in their fight to remove tax provisions from a bill now being considered by the Senate, which supporters say would close loopholes for U.S. firms doing business overseas and opponents claim would place them at a disadvantage to foreign competitors and thereby reduce U.S. exports.
The tax loopholes at issue relate to underlying provisions in the U.S. tax code designed to help U.S. firms doing business overseas avoid double taxation.
Proponents of closing the loopholes argue that the provisions in question are perverting the original tax exemptions by allowing multinationals to avoid U.S. taxes to a greater degree than they have been taxed abroad. Opponents of the bill's provisions say that the loopholes are needed enhancements to U.S. competitiveness in the global marketplace.
The eight foreign tax loophole provisions were passed by the House on May 28 as part of the American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213).
They are also included in a Senate amendment in the nature of a substitute to the H.R. 4213 unveiled by Sen. Max Baucus (D-MT) on June 16. The tax provisions were once again included in a revised Baucus amendment, which was changed to reduce spending, in the nature of a substitute introduced on June 17. That bill failed to win a cloture vote on the Senate floor on the evening of June 17 but could once again be revised.
They would raise $14.5 billion over ten years to pay for other provisions in the bill, such as the funding of Medicare reimbursements for doctors.
An amendment sponsored by Thune that included the elimination of the foreign tax provisions in addition to other controversial provisions was defeated on a procedural vote on the Senate floor on June 17. Thune's amendment 4376 would have also capped total federal employment and cut off remaining stimulus funds among other things.
Bond introduced amendment 4357 to strike the group of eight foreign tax provisions and another "carried interest" provision, which would force income for fund managers to be counted as ordinary income rather than capital gains that face lower taxes.
Sources said that the carried interest provision is opposed by key Democrats. In addition, swing vote Republican Sen. Olympia Snowe (R-ME) has come out against the bill's other revenue raiser which would affect the ability of services firms filing taxes as S Corporations to claim personal income as corporate income.
Bond did not offer his amendment on June 16 because that day's version of the Baucus substitute amendment was defeated on a procedural vote. But Bond expects to offer the amendment to the June 17 version of the Baucus bill, according to an aide.
Until Bond emerged with his amendment, opponents were fearful that they would lose the fight over the tax provisions. One opponent said a key lobbying challenge has been explaining the mind-numbing detail of the foreign tax provisions to senators.
Opponents are especially angered that the provisions would be retroactive to the date of introduction of the bill in May, thereby jeopardizing existing business deals, they say.
On June 14, major business organizations forming the Promote America's Competitive Edge, urged all members of the Senate in a letter to defeat the foreign tax provisions. The letter charged that these provisions will disadvantage U.S. firms vis a vis their foreign competitors and reduce American jobs generated by U.S. multinationals.
The letter was signed by the American Chemistry Council, the Association For Manufacturing Technology, the Association of Equipment Manufacturers, the Business Roundtable, the Business Software Alliance, the Emergency Committee for American Trade (ECAT), the Financial Executives International's (FEI) Committee on Taxation, the Information Technology Industry Council, the National Association of Manufacturers, the National Foreign Trade Council, the Retail Industry Leaders Association, the Silicon Valley Leadership Group, the Software Finance and Tax Executives Council, the Software & Information Industry Association, TechAmerica, TechNet, Technology CEO Council, U.S. Chamber of Commerce and the United States Council for International Business.
In a paper prepared for the Peterson Institute for International Economics, Gary Hufbauer and Theodore Moran argue that the provisions would spur U.S. multinationals to divest from the U.S. and move headquarters abroad. They argue that because of this the bill would actually reduce exports because these companies would suffer.
They cite a study showing that 10 percent increases in foreign investment result in a 2.2. percent increase in additional domestic investment, spurred by the increased profits earned abroad.
Rejecting these arguments is Steven Wamhoff of Citizens for Tax Justice, who says this logic is flawed. He said the 2.2 percent increase in domestic investment should be compared negatively to a 10 percent increase in domestic investment which the firm may be prompted to seek if it did not have the tax loophole for overseas operations.
He took issue with the Peterson Institute's conclusion that the tax credits are needed because the U.S. combined state and federal corporate tax rate of 39 percent is one of the highest in the world. Wamhoff argues that "corporate taxes in the U.S., as a percentage of GDP, are not particularly burdensome, compared to those of other industrialized nations." He states that U.S. companies should simply petition Congress for a lower corporate tax rate rather than abusing tax credits.
"These corporations are really using foreign tax credits to reduce their U.S. taxes on their U.S. income," he said. "Surely we should all agree that this is not the purpose of the foreign tax credit."
The U.S. taxes corporations on worldwide income while most other nations have a territorial taxation system that only taxes what is earned in their jurisdiction. U.S. firms would be at a disadvantage compared to foreign competitors if the U.S. did not allow them to deduct foreign taxes from their U.S. taxes.
Under current law, U.S. firms generally pay only the foreign tax on their foreign earnings and a small additional tax when repatriating the profits back to the U.S.
One of the provisions related to the "splitting" for foreign income was included in President Obama's 2011 Budget Proposal. This provision is opposed by some organizations such as the National Foreign Trade Council but other business representatives such as the Chamber of Commerce are neutral on it.
The splitting provision would specify that U.S. tax credits can only be granted on income when it is taxable in the U.S. It is targeted to firms which defer U.S. taxation indefinitely by never repatriating their profits and reinvesting it abroad while claiming a credit for future taxes on those profits.
A key provision out of the eight foreign tax loophole closers involves one allowing companies to characterize stock acquisitions as "asset acquisitions" for purposes for receiving a tax credit. Proponents say this loophole generates credits on income that is not taxable in the U.S. and therefore exceeds the mandate to prevent double taxation.
Opponents, such as the U.S. Chamber, say the provision encourages acquisitions by U.S. firms of foreign competitors and should be maintained.
Another key provision addresses the so-called "hop-scotch" rule which involves how dividends paid by foreign subsidiaries are granted foreign tax credits. Many multinationals, according to a House Ways and Means Committee summary of the bill, set up multiple tiers including subsidiaries located in tax havens.
The hop-scotch rule allows foreign dividends to be "deemed" as U.S. dividends and companies can claim higher tax credits than taxes actually paid, according to the Ways and Means summary. According to the U.S. Chamber, without the hop-scotch tax planning tool, multinationals would choose simply not to repatriate profits since they would not be given the tax credit any longer. -- Erik Wasson