International Taxes

In a letter to congressional tax writers, the Coalition for Competitive Insurance Rates on Monday warned that legislation denying a tax deduction for reinsurance premiums paid to offshore companies would violate international trade rules.

"[The bill] essentially imposes an isolationist tariff on international insurance companies conducting business in the U.S.," the letter states, adding, "[It] could spur retaliatory actions by other countries and ultimately damage relationships with important U.S. trading partners."

The letter argues the proposal breaks long-standing tax policy and also violates World Trade Organization rules that forbid a country from giving preferential treatment to a domestic company over a foreign-based competitor.

During the Memorial Day break, the Business Roundtable spoke with senators in hopes of stripping a series of tax increases on U.S. multinational companies from the so-called tax extender bill.

"We think it is absolutely counter-productive to shoot the portion of the U.S. economy that right now is doing better than the rest of the economy because they are participating in those markets around the world that are growing," Business Roundtable President John Castellani told The Hill, adding, "This is a direct hit on their competitiveness." 

Treasury Secretary Timothy Geithner on Wednesday said the G-20 is not likely to endorse a global tax on banks when the group meets in South Korea later this week to shore up global recovery efforts that have been shakened by the economic crisis in Europe.

"There's not universal suppport for that [tax] across the G-20, at least at this stage," Geithner told reporters. "And I don't think that is going to change in Korea."

A global tax on banks has been suggested as a way for lending institutions to repay governmental bailouts, but some of the developing G-20 countries oppose the idea since their banks did not receive bailout money.

The U.S. Chamber of Commerce sent a letter to lawmakers urging them to reject legislative proposals that close international tax breaks. 

"Companies already are facing approximately $500 billion in onerous new taxes under the health care legislation over the next 10 years," the letter stated. "In order to keep American worldwide companies competitive, create and maintain jobs in America, and keep foreign investments flowing into the U.S. economy, Congress cannot impose punitive taxes every time they seek to spend money, especially when these tax incentives are targeted at the very employers that are in the best position to hire and keep the U.S. economy strong." 

Steve Miller, enforcement commissioner at the IRS, told senators on Thursday that tax revenue is still being lost offshore despite recent attempts by Congress to end the practice. 

Miller urged lawmakers to pass legislation that would make it harder for taxpayers to transfer intangible property offshore and deny companies the ability to deduct reinsurance premiums paid to foreign affiliates. 

"I think they will help, in terms of the shifting of income overseas and they will help in terms of our largest business taxpayers shifting to a low tax jurisdiction and escape U.S. tax," Miller said. 

The commissioner's position will likely incite a corporate lobbying blitz to keep these tax breaks from being repealed. Read more...

Lawmakers applauded on Tuesday an agreement on cotton dispute that lets the U.S. avoid paying $820 million in higher tariffs that Brazil was set to impose on U.S. exports this week. 

Trade Representative Ron Kirk and Agriculture Secretary Tom Vilsack announced the deal in a release that the two nations had "agreed to a path in the long-standing cotton dispute." A final deal is expected in June. 

Senate Finance Chairman Max Baucus (D-Mont.) called the agreement "a significant step forward toward final settlement" of the dispute. "As a result of this agreement, Brazil will refrain from imposing higher tariffs on U.S. goods, including Montana wheat, and will not withdraw protections for U.S. intellectual property.

"Today's announcement that Brazil has decided to pursue negotiations with the United States, rather than to impose countermeasures on U.S. agricultural and manufactured goods, services and intellectual property, is a positive development," said Rep. Sander Levin (D-Mich.), chairman of the House Ways and Means Committee. 

President Obama on Thursday is expected to sign into law the $17 billion HIRE Act that passed the Senate on Wednesday. 

Aside from providing businesses tax incentives to hire and keep workers on the books, the bill also expands the types of entities that must comply with IRS reporting rules on foreign accounts. 

Hedge funds, private equity funds as well as fund managers located in the U.S. must either disclose foreign account holdings or face a 30 percent withholding tax. This new requirement will likely get pushback from financial firm leaders, who will seek to ensure that regulators do not make the law too onerous. Treasury has broad authority in creating the regulation. 

"Securities industry representatives have voted concerns that the HIRE Act will necessitate costly reporting systems that will be extremely difficult to implement," said Jim Hamilton, Principal Securities Law Analyst at CCH, in prepared remarks. "It addition, reporting systems may run afoul of foreign data-protection and privacy laws."

Rep. Joe Crowley (D-N.Y.) looks to introduce legislation this spring that allows foreign investors easier access to purchase U.S. properties.

His bill will amend the Foreign Investment in Real Property Tax Act, or FIRPTA, which taxes capital gains on property held by foreign investors to keep them from buying up too much land in the U.S. 

Crowley told The Hill that changes would not affect the entire bill. 

“This is not a full blown, open FIRPTA,” he said. 

In related news, PriceWaterhouseCoopers on Tuesday released a survey showing commercial real estate had encouraging signs of improvement in the first quarter of 2010.  Crowley was dubious. 

“We’re hearing $190 billion worth of commercial real estate out there is under water,” he said. 

Crowley is working with the Congressional Budget Office to score his bill. Lobbyists say the preliminary dollar figure for the legislation was too high and the entire package is being reviewed to see where cuts can be made. 

Lobbyists will seek to dissuade House Ways and Means Chairman Sandy Levin (D-Mich.) from requiring U.S. multinationals to withhold taxes on certain payments  made to foreign citizens.    

Levin on Monday introduced a small business tax bill costing roughly $13 billion over 10 years. The package provides a 100 percent exclusion of small business capital gains, extends Build America Bonds beyond its current deadline, and increases deductions for start-ups on certain purchases.

It also repeals a rule that currently allows U.S. multinationals to not withhold taxes on certain dividends and interest paid to foreigners.  

A Ways and Means summary of the provision is:

Under current law, dividends and interest paid by a domestic corporation are generally considered U.S.-source income to the recipient and are generally subject to gross basis withholding if paid to a foreign person. If at least eighty percent (80%) of a corporation’s gross income during a three-year period is foreign source income and is attributable to the active conduct of a foreign trade or business (a so-called “80/20 company”), dividends and interest paid by the corporation will generally not be subject to the gross basis withholding rules. Furthermore, interest received from an 80/20 company can increase the amount of foreign tax credits that may be claimed by U.S. multinational corporations… The bill would repeal the 80/20 rules for interest paid by resident alien individuals.

The Treasury Department claims the provision has been the subject of abuse and President Obama’s budget proposal urged repeal of the measure.

Lobbyists are expected to argue that withholding the tax will dry up corporate reserves and hinder their ability to recover from the current economic downturn. It is unclear if Levin will accept this argument.

Trade agreement won’t happen until the nation meets higher tax and labor standards, Democrats and watchdogs say.