EoW November 2010

EuroWire – November 2010

Taxing overseas earnings

A new law closes some loopholes used by

American companies with foreign

operations – but broader tax reform will wait

Multinational rms based in the US must pay more under new

tax provisions signed into law by President Barack Obama on

August. But early commentary by lawmakers and tax advisers

suggests that this is not the opening wedge of the sweeping

reform that Mr Obama wants to see in the way overseas earnings

are taxed. The new legislation will raise taxes on multinationals by

$960 million a year; the president’s plan would yield $9.5 billion.

The Obama proposals would mean a fundamental shift in the

current method of taxing foreign earnings of US rms, and they

will not be realised without a ght in Congress.

Meanwhile, the new limits on the use of foreign tax credits are

not inconsiderable altogether. Part of a $26 billion package of

health and education funding, the provisions will put an end to

certain techniques employed by rms to lower the tax hit on

their overseas earnings.

Martin Vaughan, a business and nancial news reporter for the

Wall Street Journal

, described one such technique, shut down

by the new law. It took advantage of di erences between US

partnership laws and foreign laws to generate more foreign tax

credits than needed to avoid double tax in an acquisition. As

a rule, Mr Vaughan noted, US rms can claim a credit against

US taxes on foreign income equal to the amount of tax paid to the

foreign jurisdiction. (“US Multinationals Take Tax Hit but Dodge

Bigger Bullet,” 11

August)

The President has proposed to limit the ability of companies to

defer taxes on income that is not repatriated to the US. He also

recommends changes to taxation of payments between a liated

units within the same company, an area known as “transfer

pricing.”

Those more far-reaching proposals await a broader tax overhaul.

Hank Gutman, a tax principal at the Dutch-based international

accountancy rm KPMG, told the

Journal

, “I would be surprised

to see signi cant forays into the international tax structure at

this stage of the game.”

“USmultinationals fought the narrower foreign tax-credit changes

in the education and health-funding measure through their

Washington trade organizations,” wrote Mr Vaughan. “But few

companies stepped forward to publicly defend the practices.”