The Treasury threatens to double some businesses


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The last thing America needs is job loss. This is what we will achieve if the Biden administration does not reverse its double taxation plan on some of the largest companies in the country.

Earlier this year, the Treasury Department rolled out regulations that could have a disastrous impact on US businesses operating overseas. In President Biden’s most influential tax change to date, the Treasury has limited companies’ ability to apply for foreign Section 901 tax credits for income taxes paid in foreign countries. Some companies will have to pay domestic corporate income taxes in addition to the foreign taxes they already pay.

Taxing income twice will disrupt business operations and discourage foreign investment and acquisitions. Some companies operating in foreign countries may move their headquarters outside the United States to avoid taxes.

Prior to the change, the Section 901 foreign tax credit was widely available to businesses to eliminate double taxation on foreign income. Section 901 is a dollar-for-dollar credit available to corporations and individuals who pay income taxes in a foreign country. Section 901 ensures that businesses are not subject to double taxation on the same income. This significantly reduces their tax burden and investment costs in the United States and abroad. Foreign tax credits are especially useful for US companies operating in countries with which the US does not have a tax treaty, such as Brazil, Chile, and Argentina.

The apparent purpose of the new legislation is to ensure that credit is only available abroad income taxes, not other taxes. But his definition of “income tax” is too restrictive. The new regulations allow companies to claim credit for corporate income taxes or capital gains only if the foreign taxing country follows a newly created and vague “net gain test”. Under the net gain test, companies can only apply for the foreign tax credit if the foreign country follows particular aspects of the U.S. tax system, such as allowing depreciation, interest deduction, and other standard rules of the U.S. tax code. US corporate income.

Brazil would likely fail the net gain test. Its transfer pricing system does not explicitly refer to the “arm’s length principle”, a rule that requires companies to do business fairly with their foreign subsidiaries. Another example is Hong Kong, which does not allow the deduction of interest for the payment of interest to foreign entities. The deductibility of interest is fundamental in the new regulations. This means that around 1,300 US companies operating in Hong Kong would be at risk of double taxation.

The new regulations vitiate the purpose of the credit, which is to allow US companies to escape double taxation in the absence of a tax treaty. And the consequences will be severe. Companies operating in countries outside the US tax treaty system face a costly decision. They can risk IRS audits if they claim credit, make the costly move to divest from these countries, risk having to pay double tax on their overseas income, or leave the United States

Double taxation is always a bad idea. It leads to less investment, fewer jobs, lower wages and relocation. The Biden administration’s decision to restrict the availability of foreign tax credit and increase the ability for companies to pay double taxation on foreign income will have direct economic consequences at home and abroad. If these rules are not reversed, the world economy will suffer and the United States will move closer to recession.

Mr. Nix is ​​studying tax law at Georgetown University Law Center.

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