The Star Early Edition

Pro­posed 20% US tax bill draws flak

Tar­get­ing cross-bor­der trans­ac­tions, it could dis­rupt global sup­ply-chains

- Amanda Becker and Tom Ber­gin 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 per­cent tax on cross-bor­der trans­ac­tions they rou­tinely make be­tween re­lated busi­ness units.

Euro­pean multi­na­tion­als, some of which cur­rently pay lit­tle US tax on their US profits thanks to tax treaties and di­ver­sion of US earn­ings to their home coun­tries or other low­tax 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 Or­gan­i­sa­tion 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.

Scram­bling

The pro­posed tax, tucked deep in the 429-page bill backed by US 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.

Seven multi­na­tional com­pa­nies and four in­dus­try groups con­tacted would not com­ment on the pro­posal, with most say­ing they were still study­ing the 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

Backed by Trump, bill could run afoul of global tax treaties that for­bid dou­ble tax­a­tion of profits.

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 per­cent ex­cise tax is one such pro­posal tar­get­ing the abuses of so­called trans­fer-pric­ing 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 trans­fer­pric­ing is­sue and some­thing should be done,” said Steven Rosen­thal, se­nior fel­low at the Tax Pol­icy Cen­ter, a non-par­ti­san Washington think-tank.

Blunt in­stru­ment

“I would view this 20 per­cent 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, or 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 per­cent tax on these or agree to treat the amounts as in­come con­nected to their US busi­ness and sub­ject to US taxes.

As pro­posed, the new tax rule would apply only to busi­nesses with pay­ments from US units to for­eign af­fil­i­ates ex­ceed­ing $100 mil­lion (R1.4 billion). The rule would not take ef­fect un­til af­ter 2018.

Euro­pean com­pa­nies that sell for­eign-made prod­ucts into the US mar­ket through lo­cal dis­tri­bu­tion units could be among those most af­fected, said Michael Mun­daca, codi­rec­tor of the na­tional tax department at the ac­count­ing firm Ernst & Young.

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