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Wednesday, October 6, 2010

President Obama Issues Plan to Reform U.S. International Tax Laws


On Monday, May 4, 2009, President Obama released a proposal for "getting tough" on overseas tax havens and eliminating certain "tax advantages" for U.S. corporations that do business and invest overseas.

Eliminating deductions in the US for expenses tied to overseas expansion, unless companies are paying US income tax on revenue from those operations;

AMLLP Observation: This could mean, for example, where a U.S. parent borrows domestically to invest offshore, the interest expense associated with such offshore investment would be suspended until such time and to the extent offshore profits are repatriated to the U.S. parent.

Reducing the ability of US companies to utilize US income tax credits for foreign tax payments (foreign tax credits or “FTCs”);

AMLLP Observation: Although the scope of this proposal is unclear, the release indicates that an FTC “would no longer be allowed for foreign taxes paid on income not subject to U.S. tax”. This provision appears to be aimed at transactions intended to enhance or “hype up” a U.S. company‟s FTC, frequently through the use of the check-the-box rules.

Eliminating provisions that allow U.S. corporations to avoid current US income taxation by shifting income from one foreign subsidiary to another utilizing “check-the-box” provisions;

AMLLP Observation: The check-the-box provisions are a common international tax planning tool. For example, subpart F income can be avoided on passive income (such as interest) or on income from intercompany product sales by treating foreign subsidiaries as “disregarded”. Limiting the use of the check-the-box provisions would have significant implications for the existing structures of many Bay Area companies.

Increasing enforcement and reporting requirements for overseas financial institutions and individuals who hold funds or make deposits overseas.

Some Tax Relief Too…

The release provides that the savings associated with closing the above “loopholes” would be used to invest in U.S. jobs by making permanent the research and development credit on research conducted in the United States.

It is still too early to tell the implications of these proposals, as there is little doubt they will be modified extensively before enactment into law.

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