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Friday, June 3, 2011

U.S. Budget Provision Designed to Capture Revenue from U.S. Businesses' ‘Excess' Intangibles Income in Low-Tax Jurisdictions

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The Obama administration's fiscal year 2011 budget unveiled Feb. 1 contained a broad-ranging package of international tax provisions estimated to raise $122 billion over 10 years, including provisions to prevent shifting of high-value intangibles income out of the United States.

One of the proposals, as described by the Treasury Department's greenbook explanation of revenue proposals, would “tax currently excess returns associated with transfers of intangibles offshore.”
The explanation states: “If a U.S. person transfers an intangible from the United States to a related controlled foreign corporation that is subject to a low foreign effective tax rate in circumstances that evidence excessive income shifting, then an amount equal to the excessive return would be treated as subpart F income in a separate foreign tax credit limitation basket.”
The second provision, similar to one proposed in May, is designed to limit shifting of income through intangible property transfers. The greenbook explanation states: “To prevent inappropriate shifting of income outside the United States, the proposal would clarify the definition of intangible property for purposes of sections 367(d) and 482 to include workforce in place, goodwill and going concern value.
“The proposal also would clarify that where multiple intangible properties are transferred, the Commissioner may value the intangible properties on an aggregate basis where that achieves a more reliable result. In addition, the proposal would clarify that the Commissioner may value intangible property taking into consideration the prices or profits that the controlled taxpayer could have realized by choosing a realistic alternatives to the controlled transaction undertaken.”
Practitioners have complained that rather than clarifying current law, the proposal would represent a clear change in the law governing outbound transfers of intangible property under Section 367 (18 Transfer Pricing Report 49, 5/28/09).
The package also calls for calculation of the foreign tax credit on a pooled basis and contained language to address transactions designed to split that credit from the underlying income. It contained significant changes from the sweeping set of proposals unveiled by the administration last May, which was estimated to raise about $151 billion.

 

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