There’s a new debate over President Biden’s latest proposal to raise taxes. But actually it’s already happened to some companies and few heard about it.
The Biden administration recently bypassed Congress in raising taxes on multi-national corporations.
That’s the contention of the Tax Foundation. In a paper, “A Regulatory Tax Hike on U.S. Multinationals,” it explains the changes in tax credits for multi-national corporations that reduce deductions and credits.
[A Regulatory Tax Hike on US Multinationals | Tax Foundation]
New Rules Few Know About
The tax increase came recently through action by the U.S. Treasury and IRS in establishing new foreign tax credit (FTC) rules, the Tax Foundation wrote.
“The foreign tax credit regulations released at the beginning of the year,” according to the paper, “represent a tax hike for many U.S. companies that earn profits from customers abroad. While the initial motivation for revising FTC rules was the adoption of digital services taxes (DSTs) in foreign jurisdictions, the final rules have impacts well beyond the DSTs.”
The paper also said that the new rules will lead to double taxation of U.S. companies and put them at a competitive disadvantage in some foreign markets.”
We Won’t Speak to You
A spokesperson for the U.S. Treasury didn’t respond to questions about the rules published in the Federal Register in January.
However, in a recent speech, Treasury Secretary Janet Yellen advocated for changes in international corporate tax rates.
[Remarks by Secretary of the Treasury Janet L. Yellen on International Priorities to The Chicago Council on Global Affairs | U.S. Department of the Treasury]
“Competitiveness is about more than how U.S.-headquartered companies fare against other companies in global merger and acquisition bids,” Yellen said. “It is about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises, and that all citizens fairly share the burden of financing government.”
She argued the U.S. must raise the U.S. minimum corporate tax rate, “recognizing that it is important to work with other countries to end the pressures of tax competition and corporate tax base erosion.”
However, in a recent letter, an American industry group writing to the Treasury warned about the new foreign tax credit rules.
The Alliance for Competitive Taxation (ACT) contended the new rules “introduce enormous uncertainty in one of the most significant areas of tax law for globally engaged U.S. companies and one which, until now, has been among the most stable. The Final Regulations include numerous novel concepts and ambiguous terminology that will inevitably result in increased compliance costs, significant uncertainty, and protracted litigation with the Internal Revenue Service.”
(actontaxreform.com)
ACT represents multi-national corporations that include Coca Cola Co, Exxon Mobil Corp. and the Alphabet Inc.
“Taxpayers will need to analyze the intent of every deduction disallowance under foreign law to determine consistency with U.S. tax principles,” ACT wrote. “Notably,” the letter continued, “neither this uncertainty nor any of these added compliance burdens will be faced by the foreign competitors of U.S. companies, with the result that U.S. companies and their workers will be less able to compete and grow in markets around the world.”
A Big Change
An analyst says the new foreign tax credit rules are a major policy change.
“This represents billions of dollars in revenue; this is something that should have been done though the House Ways and Committee or the Senate Finance Committee,” Daniel Bunn, a Tax Foundation vice president for global projects and the author of the report.
A former chairman of the Ways and Means Committee, the primary tax writing committee of Congress, said he is disturbed by the new rules. He said they ignore Congress.
“Congress sought to protect Americans from double taxation by providing a credit for foreign income taxes paid, and Treasury must remain focused on countering discriminatory taxes,” Rep. Kevin Brady (R-Texas), told me through a spokesman.
Brady, now the ranking member of the Ways and Means Committee, said he “is deeply concerned that Treasury’s new rules may not be sufficiently detailed, and that they present major challenges to taxpayers already harmed by historic backlogs and delays from the IRS. The Biden administration,” Brady continued, “should work with Congress to ensure that it is implementing the law as Congress intended.”
Bunn added that “This is also putting our companies at a competitive disadvantage with those countries where we don’t have a tax treaty.”
The new rule reads in part: “I. Disallowance of Foreign Tax Credit or Deduction for Foreign Income Taxes under Section 245A(d) Proposed §1.245A(d)-1(a) generally provided that neither a credit under section 901 nor a deduction is allowed for foreign income taxes (as defined in §1.901-2(a) paid or accrued by a domestic or foreign corporation that are attributable to specified distribution or specified earnings and profits of a foreign corporation.”
[2021-27887.pdf] (federalregister.gov)
Bunn says the rules increase the difficulty for American companies in seeking business in some African and South American countries. They affect many corporations that have or are aiming to conduct businesses with developing nations. That’s because, the Tax Foundation says, the U.S. only has tax treaties with some 66 countries; most of them in Europe but few in South America or Africa.
“The new rules,” the Tax Foundation report concluded, “essentially penalize businesses that are doing business in a non-treaty country. The costs of doing business will rise because they will no longer be able to claim FTCs for taxes that do not substantially conform to the U.S. tax code. They will be taxed twice, once under a foreign withholding tax and again under IRS rules.”
Those American companies affected are often construction or energy companies trying to obtain business in developing companies, the Tax Foundation wrote. They usually don’t have tax treaties with the United States.
