GOP Tax Bill Includes Excise Tax on Business Payments to Offshore Affiliates

GOP Tax Bill Includes Excise Tax on Business Payments to Offshore Affiliates

SURPRISE! You didn’t think the GOP tax reform bill would go off without a hitch, right? Because we all know that the government needs to keep spending so they can’t cut too many taxes.

The House Ways and Means Committee had a markup session on Monday and reports have emerged that multinational companies like Apple and Ford could possibly pay a 20% tax on any payments they make to offshore affiliates.

Bloomberg reported:

The new 20 percent tax is “the atomic bomb in the draft” legislation, said Ray Beeman, co-leader of Ernst & Young’s Washington Council advisory services group. “We’re trying to get our arms around the implications.”

So far, many big U.S. companies have kept quiet on the proposal. But already, House Ways and Means Chairman Kevin Brady has tweaked the provision to lessen its impact, part of a package of changes the tax-writing panel adopted Monday night. The committee will continue debating the bill Tuesday.

House tax writers say the proposed excise tax is aimed at preventing U.S. companies from shifting their earnings offshore to subsidiaries in tax shelters — and it moved into the spotlight this week amid a series of global investigative reports on corporate tax avoidance. But tax practitioners say the provision has far larger implications for consumer prices on a range of goods.

“It’s a very big gorilla in the living room,” said Gary Friedman, a tax partner at Debevoise & Plimpton. Tech companies, pharmaceutical makers, automakers and reinsurers are the companies most likely to be concerned, he said.

Some of the most affected companies could be those in Europe “that sell foreign-made products into the U.S. market through local distribution units.” Reuters noted that these businesses “could end up paying tax on the transfers twice – first if they paid the excise tax in the United States and then at home where they are taxed now and where the new U.S. tax would not be accounted for without changes to bilateral tax treaties.”

Experts have said that this excise tax is a way for the government to target “the abuses of so-called transfer-pricing where multinationals themselves set prices of goods, services and intellectual property rights that constantly move between their national business units.” From Reuters:

Under global standards, those prices should resemble those available on the open market. However, if a foreign parent charges U.S. affiliates inflated price, it can reduce its U.S. tax bill and effectively shift profits to a lower-tax country, reducing the entire corporation’s overall tax costs.

“Clearly there’s a transfer-pricing issue and something should be done,” said Steven Rosenthal, senior fellow at the Tax Policy Center, a nonpartisan Washington think tank.

“I would view this 20-percent excise tax as a blunt instrument to address the problem. And the problem with blunt instruments is sometimes they hit what you want to hit, and sometimes they hit what you don’t want to hit,” said Rosenthal, former legislation counsel at Congress’s Joint Tax Committee.

It sounds an awful like that border adjustment tax (BAT) that Speaker Paul Ryan and Committee Chairman Kevin Brady loved so much, but eventually abandoned after businesses lashed out at them. Bloomberg continued (emphasis mine):

The tax would apply to billions of dollars in intellectual-property royalties that technology and pharmaceutical firms make to their overseas affiliates each year — payments often linked to tax-avoidance strategies. But it would also hit U.S. companies’ imports of generic drugs, cars and other products from their affiliates. Global insurers would incur the levy on the cost of “reinsurance” they buy from foreign affiliates.

Wait. It gets worse. Again, emphasis is mine:

The provision, which is estimated to raise $154 billion over a decade, “could trigger a trade war,” Friedman said — stirring other countries to tax their companies’ imports from U.S. units.

For investors, the impact would appear as higher overall expenses in corporate financial statements across a range of industries — potentially depressing earnings, said Robert Willens, an independent tax and accounting expert.

For consumers, the result might be higher prices for imported goods and insurance premiums — a message that various lobbying groups have been eager to share with House tax writers.

Look, it’s very simple. This isn’t tax reform. it’s tax rearrangement. The government will not stop spending so they need to find revenue somewhere. Tax reform cannot happen until they slash the budget.

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