Tax reform in US targets avoidance by multinationals
Foreign multinationals have emerged as the target of a tax avoidance crackdown embedded in radical reforms unveiled by Republicans this week as they seek to stop companies from spiriting profits out of the US.
Company lobbyists who initially cheered the plan to cut the corporate tax rate from 35 percent to 20 percent were fretting over an anti-avoidance provision they said could do collateral damage to global supply chains, ft.com reported.
Their concerns underscore the formidable challenges confronting Republicans as they try to overhaul the tax code for the first time since 1986 in the face of corporate lobbying, budget constraints and an impatient President Donald Trump.
Gary Cohn, director of Trump’s National Economic Council, said the White House hoped to see the House of Representatives vote on the tax plan the week after next, when Trump returns from a trip to Asia.
The anti-avoidance proposal would hurt foreign-owned multinationals with American affiliates as well as US companies that used ‘inversion’ deals to move their head offices overseas, said Bret Wells, a tax expert at the University of Houston.
Crafted with an ‘America first’ tinge, it would impose a 20 percent ‘excise tax’ on cross-border payments between affiliates of the same company, which are tax deductible and made for materials, services and intellectual property royalties.
“Yes, we have a new design to stop inbound, unwarranted deductions of expenses,” said Kevin Brady, the chief Republican tax writer in the House of Representatives, in response to a question from the Financial Times.
Brady, chairman of the House ways and means committee, has been pushing for ways to end perceived advantages he said the current tax code gives to foreign companies versus US corporations.
Wells, who recommended similar measures to Congress at a hearing last month, said: “It’s a fairly expansive provision in the way it’s contemplated.”
He estimated that at present some companies could use tax-deductible payments between affiliates to shift as much as 3040 per cent of their profits out of the US.
Lobbyists dispute the characterization of multinationals as tax avoiders, arguing that such payments, also known as related-party transactions, are a legitimate and necessary part of internal supply chains that span the globe.
Nancy Mclernon, president of Organization for International Investment (OFII) — a trade group for foreign companies in the US — said: “We’ve got to be very careful as we craft major tax legislation that might disproportionately impact international companies because US companies can be hit by retaliatory measures as a response.”
France is pushing for the EU to agree a new turnover tax on US tech groups to make it impossible for companies such as Apple and Google to cut their tax bills by moving profits between countries.
The Republican excise tax would have a limited effect on US tech companies. Although they use IP royalties to shift profits out of the US, their ability to do so is constrained by a provision of existing law that does not apply to foreign-owned companies.
One lobbyist said the excise tax would affect other US businesses, arguing it would hit carmakers importing components from their own factories in Mexico and retailers bringing in clothing from affiliates in China.
He said it recalled an earlier Brady proposal for a levy on imports — a border adjustment tax — which was killed by an outcry from importers.
“In my view this is a border tax-lite proposal because you are taxing material being brought in to be sold in the US,” the lobbyist said.