Multinationals grapple with US Republican excise tax surprise

WASHINGTON/LONDON: The Republican tax bill unveiled last week in the US Congress could disrupt the global supply chains of large, multinational companies by slapping a 20-per cent tax on cross-border transactions they routinely make between related business units.

European multinationals, some of which currently pay little US tax on US profits thanks to tax treaties and diversion of US earnings to their home countries or other low-tax jurisdictions, could be especially hard hit if the proposed tax becomes law, according to some tax experts.

Others said the proposal could run afoul of international tax treaties, the World Trade Organization and other global standards that forbid the double taxation of profits if the new tax did not account for income taxes paid in other countries.

The proposed tax, tucked deep in the 429-page bill backed by President Donald Trump, caught corporate tax strategists by surprise and sent them scrambling to understand its dynamics and goals, as well as whether Congress is likely ever to vote on it.

Reuters contacted seven multinational companies and four industry groups. None would comment directly on the proposal, with most saying they were still studying the entire tax package.

The proposal is part of a broad tax reform bill unveiled by House of Representatives Republicans on Thursday, which promises to lower overall tax burdens and simplify the tax code.

Whether the proposed reforms ever become law is uncertain, with weeks and possibly months of debate and intense lobbying still ahead. The House package overall has drawn criticism for adding too much to the federal budget deficit and too heavily favouring the rich and big business.

However, the corporate tax part, experts said, included some ambitious proposals worthy of further discussion.

They said the 20 per cent excise tax is one such proposal targeting the abuses of so-called transferpricing where multinationals themselves set prices of goods, services and intellectual property rights that constantly move between their national business units.

Under global standards, those prices should resemble those available on the open market.

However, if a foreign parent charges US affiliates inflated price, it can reduce its US tax bill and effectively shift profits to a lower-tax country, reducing the entire corporation’s overall tax costs.

“Clearly there’s a transfer-pricing issue and something should be done,” said Steven Rosenthal, senior fellow at the Tax Policy Center, a nonpartisan Washington think tank.

“I would view this 20-per cent excise tax as a blunt instrument to address the problem. And the problem with blunt instruments is sometimes they hit what you want to hit, and sometimes they hit what you don’t want to hit,” said Rosenthal, former legislation counsel at Congress’s Joint Tax Committee.

Under the proposal, US business units that import products, pay royalties or other tax-deductible, non-interest fees to foreign parents or affiliates in the course of doing business would either pay a 20-per cent tax on these or agree to treat the amounts as income connected to their US business and subject to US taxes. — Reuters