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U.S. drug and technology giants with overseas operations could pay more under House Republicans’ sweeping international tax overhaul plan, practitioners told Bloomberg Tax.
The bill includes “base erosion” measures to help prevent multinationals from shifting profits, even as it allows repatriation of those profits to the U.S.—with caveats—tax-free.
To help stop that erosion, H.R. 1, the Tax Cuts and Jobs Act, would impose a U.S. tax on 50 percent of what the bill calls “foreign high returns.” The tax is 20 percent, so that total tax would be 10 percent on those returns.
The tax could affect companies that aren’t capital-intensive, practitioners said—companies that don’t have a lot of physical property and do a hefty amount of business centered on intangibles.
Drug manufacturers and IT companies could fit that bill, according to Phil West, chairman of Steptoe & Johnson LLP. “Those could suffer quite a bit,” he said. “That 50 percent tax could be a very big number.”
Another provision of the bill that is a “disappointment,” according to Robert J. Kovacev, a Steptoe partner, is its requirement that profits already held offshore be repatriated. There’s a double rate—12 percent for cash and cash equivalents, and 5 percent for other types of assets.
Companies thought the rate would be lower, even though the ability to pay the tax over eight years eases the pain, he said.
Overall, the bill does provide a hefty break for companies bringing profits home going forward. But there are exceptions.
It’s crafted so that taxpayers could exempt 100 percent of the foreign-source portion of dividends paid by a foreign corporation to a U.S. corporate shareholder. The shareholder would have to own 10 percent or more of the foreign company.
Taxpayers couldn’t get a foreign tax credit or deduction on any foreign taxes—including withholding taxes—paid or accrued with respect to any exempt dividend, however. They also couldn’t deduct expenses associated with an exempt dividend, or stock that gives rise to the dividend.
The tax on 50 percent of high foreign returns has attracted the most attention.
Thomas A. Humphreys, a partner with Morrison & Foerster LLP, said the provision appears to be directed at companies that have intellectual property in low-tax foreign jurisdictions.
“I think that’s what it’s aimed at,” he told Bloomberg Tax. “It’s designed to get at the income from IP, patents and trademarks, and things like that.”
He said a 20 percent U.S. corporate tax rate—proposed as part of the larger reform bill—would “ease the pain.” At the same time, he said, the 50 percent provision raises major questions for IT, pharmaceutical, and other companies with intangibles offshore.
Republican Ways and Means member Carlos Curbelo (Fla.) said there’s a need for international provisions to make sure multinationals pay their share.
“There’s been a lot of abuse of our tax system over the years. A lot of companies have taken advantage of low-tax jurisdictions and shifted jobs and companies overseas and it’s time to put an end to those games,” Curbelo told Bloomberg Tax.
Under the bill, a high return would be measured as the excess of a U.S. parent’s foreign subsidiaries’ aggregate net income over a “routine return"—7 percent, plus the federal short-term rate—on the foreign subsidiaries’ aggregate adjusted bases in depreciable tangible property, adjusted down for interest expensing. The foreign high return wouldn’t include income connected with a U.S. trade or business, Subpart F income, insurance and certain financing income, income from the disposition of commodities, or certain related-party payments.
Both West and John Harrington, a Dentons LLP partner, said the 50 percent tax on high foreign returns appears to have taken the place of the global minimum tax originally floated in a framework released by White House officials and Republican tax writers about a month ago.
Kovacev said the 50 percent provision, along with another provision that would tax all deductible payments between U.S. and foreign affiliates, could have the impact of taxing money sitting offshore that hasn’t been taxed anywhere.
That could ease efforts by the European Union and several European countries to get at that money through lawsuits and laws of their own, Kovacev said.
West said he doesn’t consider the bill a big win for U.S. companies with global operations.
“I wouldn’t necessarily say that it’s a win,” he told Bloomberg Tax. “It has aspects that have long been sought by multinationals, but there’s a price to pay.”
“The world is watching to see whether Congress can deliver on international reform,” Kovacev said.
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A section-by-section summary of the bill is at http://src.bna.com/tVB
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