Administration’s International Tax Proposals President Obama’s budget proposals include a substantial part from $210 billion over the next 10 years by overhauling international taxes, affecting primarily multinational corporations. There are four major proposals (and six additional proposals) as part of his fiscal 2010 budget, which would not take effect until 2011. 1. Reform the check-the-box rules, which currently allow multinationals to choose how their offshore subsidiaries are classified for U.S. tax purposes. Multinationals (U.S. corporations with “certain corporations overseas”) would be required to report such subsidiaries as controlled foreign corporations (rather than disregarded entities) on their U.S. tax returns, making them subject to Subpart F rules. This provision would raise $86.5 billion over 10 years. 2. Change to deferral – changing the rules for deductibility of foreign expenses. As proposed previously (in Section 3201 of HR 3970 in 2007) by House Ways and Means Chair Charles Rangel, the proposal would require companies to defer deductions for expenses allocated to foreign income until that foreign income is repatriated to the U.S. and subject to U.S. taxes. However, President Obama would exempt deductions for research and experimentation expenses. Changing the deferral rules would raise $60 billion from 2011 through 2019 (while Rangel's version with other international changes was projected to raise $106 billion in total). 3. Reform the foreign tax credit rules, including limiting cross-crediting and prorating foreign taxes over the taxpayer's entire foreign income, including deferred income, neutralizing the effect of rate differentials. The reforms would ensure that a taxpayer's foreign tax credit is based on the amount of total foreign tax actually paid on total foreign earnings. Further, a foreign tax credit would not be allowed for foreign taxes paid on income not subject to U.S. tax. This proposal would raise $43 billion from 2011 to 2019. 4. Strengthen the “Qualified Intermediary” (QI) system and increase international tax enforcement. A. The proposals would require withholding of between 20 percent and 30 percent tax on U.S. payments to individuals with accounts at non-QI foreign financial institutions, and would require taxpayers to identify themselves and demonstrate compliance with U.S. law before the withheld taxes would be refunded. B. The proposal would also establish a rebuttable presumption that any foreign financial account held by a U.S. citizen at a non-QI contains enough funds to require an FBAR be filed, and that a failure to file an FBAR is willful if the account has a balance greater than $200,000 at any time during the year.
C. The proposal would give the Treasury Department the authority to allow a financial institution to be a QI only if all commonly-controlled financial institutions are also QIs. D. It would require QIs to report information on their U.S. customers to the same extent as U.S. financial intermediaries; E. It also would require U.S. investors to report on their tax returns transfers of money or property made to or from non-QI financial institutions; and F. It would strengthen information reporting requirements for financial institutions on transactions that establish a foreign business entity or transfer assets to and from foreign financial accounts on behalf of U.S. individuals. Increase Penalties for Failing to Report Overseas Income. The Administration would double certain penalties when a taxpayer fails to make a require disclosure of foreign financial accounts. Extend the Statute of Limitations for International Tax Enforcement. The Administration would increase the statute of limitations on international tax enforcement to six years. Increase International Tax Enforcement. The IRS would be provided funds to hire 800 new employees for international enforcement efforts. The QI and additional three enforcement proposals would raise $8.7 billion over 10 years. Additional international proposals in the budget would: Tighten the section 901 dual-capacity taxpayer rules, which limit the use of foreign tax credits by taxpayers that are subject to a levy imposed in a foreign country and that have received a specific economic benefit (such as, a business relationship with that country). Foreign levies would be treated as creditable only if the foreign country generally imposes an income tax. ($4.5 billion over 10 years). Target foreign investors who evade U.S. withholding taxes by entering into equity swap arrangements. IRS Notice 97-66 would be repealed and new guidance issued that "eliminates the benefits of such transactions but minimizes overwithholding." ($1.4 billion over 10 years). Repeal the 80/20 company rules that treat as foreign-source income certain dividends and interest paid by a domestic corporation if at least 80 percent of the corporation's income over 3 years comes from foreign sources ($1.2 billion over 10 years). Repeal the boot-within-gain limitation under section 356(a)(1) to curb earnings repatriation through cross-border reorganizations ($297 million over 10 years).
Tighten limits on deductions for interest paid by overseas corporations to domestic parent companies ($1.2 billion over 10 years). Clarify the definition of intangible property under sections 367(d) and 482 to prevent income shifting overseas ($2.9 billion over 10 years). On the positive side, the President’s plan would permanently extend the research and experimentation tax credit, at a cost of $74.5 billion over 10 years. More details on these proposals are available at http://www.ustreas.gov/press/releases/tg119.htm and http://www.treas.gov/offices/taxpolicy/library/grnbk09.pdf. The tax writing committees in Congress will now consider and study the issues. The AICPA International Tax Technical Resource Panel will also continue to monitor and analyze these proposals.