Opinion | Treasury Threatens to Double-Tax Some Companies

Taxing revenue twice will disrupt enterprise operations and discourage international investments and acquisitions. Some companies working in international nations would possibly transfer their headquarters out of the U.S. to keep away from the tax.

Earlier than the change, the Part 901 international tax credit score was broadly out there to companies to get rid of double taxation on international revenue. Part 901 is a dollar-for-dollar credit score out there to companies and people who pay revenue taxes abroad. Part 901 ensures that corporations aren’t double-taxed on the identical revenue. That considerably reduces their tax burdens and the prices of investing within the U.S. and overseas. International tax credit are particularly useful for U.S. corporations working in nations with which the U.S. doesn’t have a tax treaty, similar to Brazil, Chile and Argentina.

The ostensible objective of the brand new laws is to make sure the credit score is accessible solely on international revenue taxes, not some other tax. However its definition of “revenue tax” is simply too slim. The brand new laws permit corporations to say the credit score for company revenue taxes or capital-gains taxes provided that the taxing international nation follows a newly created—and imprecise—“internet acquire check.” Beneath the web acquire check, corporations can declare the international tax credit score provided that the international nation follows specific facets of the U.S. tax system, similar to permitting for depreciation, curiosity deductions and different normal guidelines of the U.S. company revenue tax code.

Brazil would doubtless fail the web acquire check. Its transfer-pricing system fails to make specific reference to the “arm’s size precept,” a rule that requires corporations to function pretty with their international subsidiaries. One other instance is Hong Kong, which doesn’t permit curiosity deductions for curiosity funds to international events. Curiosity deductibility is important within the new laws. Meaning roughly 1,300 U.S. companies working in Hong Kong can be liable to double taxation.

The brand new laws vitiate the aim of the credit score, which is to permit U.S. corporations to flee double taxation within the absence of a tax treaty. And the implications shall be extreme. Corporations working in nations exterior the U.S. tax-treaty system have a expensive determination to make. They’ll threat IRS audits in the event that they declare the credit score, make the costly transfer to divest from these nations, threat having to pay double tax on their international revenue, or go away the U.S.

Double taxation is at all times a foul thought. It results in much less funding, fewer jobs, decrease wages and off-shoring. The Biden administration’s determination to slim the provision of the international tax credit score and enhance the opportunity of corporations paying double tax on their international revenue may have direct financial penalties at residence and overseas. If these laws aren’t reversed, the world economic system will undergo and the U.S. will transfer nearer to a recession.

Mr. Nix is learning tax legislation at Georgetown College Legislation Heart.