Pushback likely on 80-20 provision in Levin tax bill

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.