Obama US International Tax Reform Proposals
Changes are Forthcoming
In February of this year, the White House released the budget outline of the Obama administration, setting forth its plans for the coming years. The plans herald the beginning of the new era in fiscal policy as they attempt to address new sources of revenue to fund federal spending and reduce the federal deficit, which is expected to reach an unprecedented level by the end of 2009. On May 4, 2009, the Obama administration announced a sweeping tax reform proposal that would affect all US taxpayers doing business abroad and/or holding international investments. On May 11, 2009, the Treasury Department released General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals (the “Green Book”). These proposals have wide-ranging impact. If enacted into law, they would be the most significant attempt at revising the international aspects of US federal taxation laws in decades and have the potential to radically alter the way US companies do business abroad. The administration is moving forward with these proposals very quickly, riding the popularity of the new president and using the economic crisis to its advantage. Against this backdrop, it is imperative for business leaders, especially tax executives, to understand how these changes are unfolding and how these could affect business and investments abroad. Failure to prepare could have dire consequences for the bottom line.
Key International Tax Proposals
• Entity Classification (CheckThe-Box) Restrictions • Deferral of Foreign-Related Deductions • Pooling of Deemed Paid Foreign Tax Credit • Repeal of 80/20 Company Rule • Changes to Intangible Property Transfer Rules • Research & Experimentation (R&E) Tax Credit Made Permanent
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Key International Tax Proposals
Entity Classification (check-thebox) Restrictions. Currently, the regulations allow taxpayers to determine the classification of an eligible business entity for US tax purposes. It is proposed that the use of the check-the-box regulations be restricted. The proposal would require US taxpayers that establish certain chains of foreign corporations having single owners to treat the lower tiered entities as corporations unless the single owner and the lower tiered corporations were created or organized under the laws of the same foreign country. Deferral of Foreign-Related Deductions. Under present rules, earnings of a foreign subsidiary of a US company are subject to US tax only when the earnings are repatriated in the form of dividends or when the anti-deferral rules (“subpart F, etc.”) apply. In other words, the tax on the foreign earnings that would have been imposed may be deferred for as long as the earnings are not brought back to the US actually or constructively. While the proposal does not directly affect the deferral regime, it is proposed that US taxpayers defer the deduction of foreign income related expenses until the associated income is taxed in the US. Pooling of Deemed Paid Foreign Tax Credit. Subject to certain limitations, a taxpayer may choose to claim a credit (instead of deduction) against its US income tax liability for income tax paid or accrued during the taxable year to a foreign country. The foreign tax credit is limited, however, to an amount equal to the pre-credit US tax on the taxpayer’s foreign source income. Under present rules, this foreign tax credit limitation is applied separately to foreign-source income in each separate category described in Sec 904(d) – passive and general. Under the proposal, section 902 deemed paid tax credits would be determined on a consolidated basis by aggregating foreign Earnings and Profits (E&P) and foreign taxes of all of the taxpayer’s foreign subsidiaries – effectively blending high and low rate tax pools. Repeal of 80/20 Company Rule. Section 861(c) provides that if at least 80 percent of a domestic corporation’s gross income during a three-year testing period is active foreign trade or business income, a limited exception applies to recharacterize interest paid by such corporations as foreign source income and exempts portion of dividends paid by such corporations from withholding tax. Prompted by perceived manipulation and abuse in the use of these rules, it is proposed that the 80/20 company rules be repealed in their entirety. Changes to Intangible Property Transfers. Section 482 currently allows the Commissioner to distribute, apportion, or allocate gross income, deductions, credits, and other allowances between related parties to reflect the income of such related parties whenever necessary in order to prevent evasion of taxes. This section also provides that in cases where intangible property is transferred, the income with respect to such transfer or license must be commensurate with the income attributable to the intangible property. In practice, the value of intangible property transferred can be controversial and the scope of intangible property under 482 and 367(d) is not clear and consistent. The proposal would amend the definition of intangible property to include certain intangibles such as workforce in place and going concern value to avoid inappropriate shifting of income abroad. The proposals also give more power to the Commissioner in valuing intangible properties. Research & Experimentation (R&E) Tax Credit made Permanent. On the bright side, the proposal would make permanent the R&E tax credit scheduled to expire on December 31, 2009
How WTP Can help
How Companies Can Prepare To learn more about how WTP can assist, please contact:
Ian Boccaccio Partner ian.boccaccio@wtptax.com Office: 914-733-7733 Mobile: 860-985-3234 Michael Minihan Partner michael.minihan@wtptax.com Office: 914-733-7737 Mobile: 914-319-4626 Worldwide Trade Partners, LLC One North Broadway, Suite 403 White Plains, NY 10601 914-733-7715 www.wtptax.com
The potential changes in the international tax arena are sweeping and US taxpayers should prepare by: • Keeping abreast of legislative developments and understanding their impact on tax planning • Evaluating non-US ownership structures, operations and tax positions • Influencing the legislative process through various advocacy groups
How WTP Can Help
WTP is a tax service firm that specializes in quantitative international tax solutions. We can assist companies by: • Identifying non US structures and gathering data in anticipation of the proposed changes in tax laws • Quantifying tax attributes such as Earnings and Profits and Tax Basis relevant to tax planning • Creating models to analyze the possible impact of legislation on planning, compliance and controversy, risk management, preparation of financial statements and tax accounting.
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