Changes in Store for Foreign Companies' Tax Treatment in U.S.
October 19 2017 - 5:59AM
Dow Jones News
By Richard Rubin
WASHINGTON -- Foreign companies operating in the U.S. could face
major changes in their tax bills under an overhaul being planned by
Republicans. Those could include new surtaxes or limits on how much
the companies can deduct on certain expenses such as rent,
royalties and interest on debt.
The changes would be meant to address an imbalance. Because U.S.
corporate tax rates are higher than they are in many other
countries, foreign companies have an incentive to book big expenses
in the U.S. so that more of their global profits get taxed at low
rates back home. A drop in the U.S. corporate tax rate will address
part of that imbalance, but not all of it, so other steps, such as
a surtax for foreign companies with headquarters or operations in
the U.S., could be imposed to level the playing field.
Lawmakers haven't announced details of any plans, but the Senate
Finance Committee sent a strong signal this month by inviting some
of the sharpest critics of foreign companies' tax maneuvers to
pitch ideas at one of the final hearings before a bill is
released.
"It looks like that is going to be a priority of the Republicans
as they put together this plan," said Michael Mundaca, a former
Treasury Department tax official and now co-director of Ernst &
Young's National Tax Department.
Under current law, foreign companies can load up their U.S.
operations with deductions for interest and royalties in ways U.S.
companies can't. That reduces profits subject to the 35% U.S.
corporate tax rate, pushing them instead to low-tax foreign
countries. U.S. companies have difficulty taking the same steps
because they're based within the U.S. tax system and would be taxed
at home if they made similar cross-border payments.
That has driven foreign takeovers of U.S. firms and so-called
inversions, deals in which U.S. companies take foreign addresses
and then avail themselves of deductions and tax maneuvers they
couldn't use before. Those deals erode the U.S. tax base, and
lawmakers worry that high-paying corporate headquarters jobs will
move abroad, too.
The GOP's tax framework, released last month, referenced "rules
to level the playing field between U.S.-headquartered parent
companies and foreign-headquartered parent companies."
Lowering the U.S. tax rate to 20% from 35% would reduce
incentives for companies to shift profits out of the U.S., but they
wouldn't disappear as long as companies find lower tax rates
elsewhere.
Bret Wells, a tax law professor at the University of Houston who
testified at the Senate's Oct. 3 hearing, said policy makers should
examine how foreign companies use interest, rents, royalties and
supply chain management to reduce U.S. taxable income. He proposed
a "base protecting surtax" on payments companies make out of the
U.S.
Foreign-based companies with U.S. operations are watching the
debate closely, said Nancy McLernon, president of the Organization
for International Investment, a trade association representing
them. Changing how the U.S. taxes its own companies' foreign
earnings will level the playing field, she said.
"It's really important that we not devolve into this 'us versus
them' scenario," Ms. McLernon said. "I'm concerned a bit about a
global tax war."
Foreign-based companies' top executives typically aren't deeply
involved in U.S. politics, but they don't lack clout. They employ
millions of Americans, and lawmakers with significant facilities in
their states are aware of their impact.
The U.S. tax system fails to make the country a desirable
location for a business headquarters, Senate Finance Committee
Chairman Orrin Hatch (R., Utah) said in a statement. "That needs to
change," he said, and that change should "include policy solutions
that will effectively target and combat inversions and not tip the
balance to tax-driven foreign acquisitions of U.S. firms."
Write to Richard Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
October 19, 2017 05:44 ET (09:44 GMT)
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