House Tax Leviathan Splats Tax Dodgers

by Mike Godfrey, Tax-News.com, Washington

12 July 2002

After Tuesday's vote by the House of Representatives' Appropriations Committee to curtail government contracts for US companies which relocate offshore in order to minimize taxes, Bill Thomas, Chairman of the Ways and Means Committee proposed yesterday that tax savings resulting from a company's move offshore should be deferred for five years.

The measure, which some Congressmen want to apply retroactively to companies that have already relocated, such as Stanley Works and Nabors, is included in the American Competitiveness Bill of 2002, announced by Mr Thomas last week, when he said that it would improve the incentive to a company to stay in the United States and reduce incentives to incorporate overseas.

The draconian bill also:

• cracks down on earnings stripping arrangements, which allow US subsidiaries to deduct from their US taxable income most interest payments to a foreign parent, thus making US companies less attractive targets for foreign takeovers and shutting down a primary incentive for US companies to move overseas;
• ensures that companies pay a tax when they transfer assets overseas;
• equalizes the treatment of corporate insiders (officers and directors) and common shareholders by imposing an excise tax on the stock options and stock based compensation held by corporate insiders at the time of an inversion; and
• imposes harsh financial penalties against individuals or companies that failed to disclose their use of tax shelter schemes to reduce tax payments.

This last clause has no doubt been tacked on in the light of the Treasury Department's current pogrom against accounting firms that help clients to optimise their tax affairs in ways which skirt around the edges of what is legally permissible.

Importantly, the bill also repeals the Extraterritorial Income Act (ETI), the regime under which export sales companies are handed tax breaks, and which replaced the original Foreign Sales Corporation legislation when it was outlawed by the WTO. The ETI scheme has also been struck down by the WTO at the EU's urging, and the EU is preparing a raft of punitive trade sanctions which will come into effect if the scheme is not replaced.

The bill has so many targets (every Aunt Sally in sight, in fact) that it can't be taken seriously. It makes sense only as a piece of electioneering - now every Congressman up for re-election this fall can go out on the stump and claim that his party is going to punish unpatriotic emigre companies, fat-cat corporate bosses, accounting firms, and the Europeans, all in one go.

'C'est magnifique, mais ce n'est pas la guerre' as a one-time republican said.

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