Lending to U.S. Companies Imperiled by Tax Reform: Foreign Banks

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By Joe Kirwin

Leading Asian, European, and Canadian banks have warned that lending to U.S. companies and consumers could dry up under U.S. Senate-approved tax reform provisions designed to clamp down on base erosion and tax avoidance.

The Institute for International Banking (IIB), which represents nearly 100 of the world’s largest non-U.S. banks, wrote in a letter to House Ways and Means Committee Chairman Kevin Brady (R-Texas) that the provision approved by the U.S. Senate would “impose double U.S. taxation” on payments made by U.S. affiliates of international banks. In separate comments Dec. 12, the European Banking Federation complained that the measures appear to be mainly “punitive.”

The Senate’s amended version of H.R. 1 includes a 10 percent “base erosion and anti-abuse tax,” referred to as BEAT, on companies that make deductible payments to foreign affiliates—including for payments on loans between units in different countries.

The House bill has different base erosion provisions. Brady, who chairs a conference committee negotiating differences between the bills, told reporters Dec. 12 that the group would probably come to a written agreement by Dec. 15.

The banking groups’ comments fit into broader fears about the international impact of the U.S. tax reform package, which includes a shift toward a territorial system. The European Commission has been closely monitoring developments amid concern that the provisions break trade rules. Several finance ministers previously flagged issues in a letter to U.S. Treasury Secretary Steven Mnuchin.

Banking Concerns

“It will force international banks to pay a U.S. tax penalty for complying with their U.S. regulatory obligations,” the IIB said in the Dec. 7 letter obtained by Bloomberg Tax. “It subjects these banks to tax on payments that are the equivalent of ‘cost of goods sold,’ which every other industry is exempt from.”

The European Banking Federation, which represents approximately 3,500 banks in the European Union, echoed the complaints of the IIB.

“The proposed measures are not designed to address abuse and therefore can only be seen as punitive,” EBF spokesman Raymond Frenken told Bloomberg Tax via email.

In its letter, the IIB also said the Senate’s BEAT provision undercuts the reduction in the headline corporate tax rate—20 percent under both versions of H.R. 1—by imposing the BEAT “on the very large gross payments international banks make and receive between their U.S. affiliates and foreign affiliates in the ordinary course of their business instead of the much smaller net payments.”

The IIB, which said it preferred the base erosion tax provision in the House bill, called for the following measures to be excluded from the final tax reform bill:

  •  interest incurred by international banks and their U.S. affiliates; and
  •  payments already subject to U.S. net income tax by the payee.

“These changes would bring the Senate BEAT closer to the House base erosion tax, which we believe would be preferable (with an adequate carve-out for payments made in connection with securities and derivatives),” the IIB said.

U.S. Economic Growth Goal Threatened

If the IIB’s recommendations aren’t adopted, the group said U.S. tax reform would undermine their goal of promoting economic growth, as foreign banks will inevitably limit or restructure the U.S. operations of international banks.

“Likely outcomes are to reduce loans to U.S. borrowers and/or restrict and diminish the efficiency of their funding sources,” the IIB said. The adjustments, the IIB said, “can be expected to raise U.S. interest rates because the cost of funding for a substantial part of the industry will increase materially.”

The IIB also emphasized that not only have its members provided 71 percent of U.S. infrastructure project loans over the past five years, its members hold 20 percent of all U.S. banking assets, much of which consists of loans to companies and consumers. In addition, the U.S. affiliates of IIB member “underwrite one-third of all U.S. dollar-denominated securities and are essential to the depth and liquidity of the Treasuries market, which in turn reduces the cost for the U.S. Government to borrow money.”

FATCA

Howard Liebman, a Brussels-based tax partner with Jones Day and the president of the U.S. Chamber of Commerce in Belgium, told Bloomberg Tax via a Dec. 12 email that the IIB’s concerns about interest paid on intra-group loans are legitimate. He added that assuming foreign banks are complying with the U.S. Foreign Account Tax Compliance Act, they are already “aiding the U.S.'s fight against tax evasion by U.S. taxpayers placing monies abroad.”

As for a potential compromise to appease the IIB and EBF concerns, Liebman said U.S. legislators could limit the Senate’s BEAT provision to “interest paid to foreign affiliates located in tax havens other than the location of the foreign banks’ head office.”

Noting that the European Union adopted a tax haven blacklist on Dec. 5, Liebman said the U.S. “could come up with its own list or could key into collateral lists such as the EU’s or the OECD’s list of uncooperative tax havens.”

To contact the reporter on this story: Joe Kirwin in Brussels at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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