The International Tax Competitiveness Act - new U.S. billl
The International Tax Competitiveness Act will help stop many of the schemes large multinational corporations use to siphon much-needed tax revenue and jobs out of the United States and help restore a level playing field for small businesses and other U.S. businesses that play by the rules.
Prevent U.S.-Run Corporations from Avoiding U.S. Taxes by Filing a Piece of Paper Abroad and Pretending to be Foreign
Problem: The United States taxes a domestic corporation on a worldwide basis. In contrast, a foreign corporation is only subject to U.S. tax on income with a sufficient nexus to the United States. Under present law, a U.S. corporation that files a piece of paper overseas can be treated as a foreign corporation, even if all its executives are located here and all business decisions are made here.
Solution: This bill would tighten the corporate residency rules so that a corporation would be considered domestic if substantially all of the executive officers and senior management who exercise day-to-day responsibility for making decisions involving strategic, financial, and operational policies of the corporation are located primarily in the United States.
Stop the Transfer of Intellectual Property to Low-Tax Jurisdictions
Problem: Current tax rules are ineffective in adequately taxing income in certain situations involving the development of Intellectual Property (IP) that is undertaken, paid for, and expensed for tax purposes in the United States and then subsequently transferred overseas to avoid U.S. taxes.
Solution: Addressing the problem of income shifting from IP migration offshore that was identified in President Obama’s Budget, this provision taxes currently the offshore income associated with the U.S.-origin intangibles. Thus, corporations will no longer be able to avoid current U.S. taxes through certain offshore royalties and contract manufacturing schemes, and will have less incentive to locate American manufacturing jobs overseas in no or low tax jurisdictions.
Repeal the 80/20 Company Rules.
Problem: Usually, dividends or interest paid by a U.S. company to foreign shareholders is subject to tax. A limited exception allows certain U.S. companies that have over 80% of their active operations overseas to avoid this tax because their operations are primarily foreign. Foreign corporations can manipulate these rules to shift income from their U.S. operations offshore without being subject to tax.
Solution: The provision repeals the 80/20 company rules. This provision is based on a proposal in the President’s 2011 Budget, and was included as an offset in the Small Business and Infrastructure Job Creation Bill.
Repeal the “Boot-Within-Gain-Limitation” for Dividends Received in Certain Reorganizations.
Problem: The boot-within-gain rule allows companies to avoid taxation on certain dividends when received as part of a reorganization. These rules may permit a domestic corporation that is a party to the reorganization to avoid U.S. income tax on the repatriation of earnings from a foreign subsidiary, or permit a foreign corporation to avoid withholding tax on the distribution of earnings from a U.S corporation.
Solution: Based on a proposal in the Administration’s 2011 Budget, the International Tax Competitiveness Act would close this loophole by repealing the boot-within-gain rule, so that these dividends made in connection with a reorganization are subject to either income or withholding tax.