Policy

Businesses Say Foreign Payment Treatment May Breach Treaties

Provisions in House and Senate tax bills draw pushback

Ohio Rep. James B. Renacci says issues with the provisions in question must be resolved in conference negotiations. (Bill Clark/CQ Roll Call file photo)

Business advocates are warning that provisions in the House and Senate tax bills aimed at discouraging offshore migration of multinational operations could trigger trade disputes and retaliation by trading partners because they conflict with tax treaties.

The Semiconductor Industry Association, representing big chipmakers such as Intel Corp., Texas Instruments Inc. and Qualcomm Inc., told Republican leaders in a Dec. 5 letter that it has trade-related concerns about two House and Senate proposals that target multinationals’ payments to foreign affiliates, including payments for parts and other goods used in manufacturing, royalties, interest and management fees.

“We note that both proposals may be inconsistent with U.S. tax treaty obligations,” SIA President John Neuffer said in the letter to Senate Majority Leader Mitch McConnell, Speaker Paul D. Ryan and the chairmen of both tax-writing committees.

Tax experts say the proposals could conflict with bilateral tax treaties that protect the deductibility of certain intercompany payments and establish a government-to-government mutual assistance program, or MAP, aimed at resolving company complaints of double taxation.

Lawmakers are trying to address a practice by which companies can claim deductions from U.S. taxes for the payments and simultaneously book the income in a country where the tax rate is lower.

Key lawmakers and lobbyists say that at least one of the two revenue-raising proposals aimed at outbound payments between related companies is likely to survive in an emerging conference report, opening the possibility of averting trade-related problems with legislative tweaks now. They could also be resolved by diplomacy or legislative action if a tax bill is enacted without changing the provisions.

Senate Finance Chairman Orrin G. Hatch of Utah and other senior tax writers in both chambers said they were aware of the case made by business advocates about proposals that potentially conflict with bilateral trade agreements or requirements of the World Trade Organization.

“Oh, yeah, there’s a real argument there,” Hatch said, adding that lawmakers were discussing ways to resolve the concerns.

Sen. John Thune said one approach would be to enact the Senate proposal and deal with potential fallout later in trade negotiations or legislation. “I don’t think it violates tax treaties. But if it did, I think we would have to look at that and figure out a way to fix it,” the South Dakota Republican said.

Lawmakers say a new law would supersede requirements in tax treaties, but could result in a disruption of accords and in foreign retaliation.

The SIA, the National Association of Manufacturers and other business groups have pushed back hard against the House proposal for a 20 percent excise tax on certain intercompany payments, including for the cost of goods — except commodities — royalties, interest and management fees, arguing that it would disrupt intercompany supply lines and practices.

Businesses have taken a more muted stance on the Senate’s proposed levy on outbound payments, which is narrower in scope and seen as the more likely survivor of the two proposals. The proposal envisions a 10 percent tax, similar to a minimum tax, on certain income of multinationals, including on royalties, interest and management fees, but excluding the cost of goods sold.

Nancy McLernon, president of the Organization for International Investment, representing more than 190 foreign-based multinationals such as Sony and Nestlé, said her group had a “great deal of concern” about the House excise tax, and predicted it would be viewed as an improper tariff that violates WTO requirements. By contrast, McLernon said her group was still examining potential trade-related concerns about the Senate proposal, but would “significantly prefer it” over the House excise tax.

Key players in both chambers called for dealing with the concerns in conference negotiations.

Rep. James B. Renacci, who is a certified public accountant, argued against moving items with trade-related flaws. “We’ve got to fix things now. We’ve got a week and a half,” the Ohio Republican said.

Sen. Rob Portman, a former U.S. trade representative, defended the Senate proposal as “consistent with our WTO obligations — we wrote it that way.” The Ohio Republican said it was structured like a minimum tax on a swath of business income, resembling levies in effect in other countries.

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