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9/11 Health Act Drops Foreign Company Tax Provision

by Mike Godfrey, Tax-News.com, Washington

23 December 2010


It is being indicated that the withdrawal of the foreign company withholding tax funding offset from the 9/11 Health Care Act has made it more likely that it will be passed by the US Congress by the end of this year.

The bill’s Democrat sponsors in the Senate, Kirsten Gillibrand and Charles E. Schumer, have disclosed that alterations to the health bill for 9/11 first responders - including trimming the bill’s overall cost by USD1.2bn to USD6.2bn – has led to a commitment from Senate Majority Leader Harry Reid to hold a vote on the bill, and that the changes were also likely to win enough Republican support to pass the legislation.

The James Zadroga 9/11 Health and Compensation Act, which has been a priority of New York’s congressional delegation for years, would provide health care for 9/11 first responders who rushed to Ground Zero in the days after the World Trade Center attack.

It was said that, under current law, certain payments (principally dividends, interest, and royalties) made by US-based entities to a parent company based overseas are subject to a 30% withholding tax, but that requirement customarily is reduced or eliminated when the payment is made to a country with which the US has a tax treaty. Companies with parents based in tax haven countries are able to effectively bypass the withholding tax by routing payments through an affiliate in a tax treaty country, which then transfers the funds to the parent company.

In order to fund the bill the original USD7.4bn cost of the bill over 10 years, it had therefore been proposed that the bill would contain a provision to limit this practice by retaining the withholding tax on certain deductible payments (principally interest and royalties) to a foreign-based affiliate, unless the tax would be reduced under a treaty if the payment were made directly to the company’s parent corporation.

The sponsors have now said that, in response to concerns raised by Senate Republicans on that provision on foreign company withholding tax, they have unveiled a new way of paying for the bill. For example, the new Senate bill would now include a 2% excise fee on certain foreign companies that receive U.S. government contracts to raise some USD4.5bn over 10 years.

It was pointed out that, every year, the US spends between USD35bn to USD40bn per year on the procurement of goods and services from foreign manufacturers and companies located abroad in countries that are not members of the Agreement on Government Procurement (GPA), instead of from American companies. The proposed 2% excise fee would therefore be imposed on foreign manufacturing companies located in non-GPA countries receiving government disbursements made pursuant to future procurement agreements. The proposal would also operate to prohibit companies from raising their prices to offset the new fee.

The remaining funds to offset the cost of the 9/11 health bill would be provided by the continuation of the visa fees on companies, who have more than 50% of their employees on outsourced jobs, for a further seven years beyond their expected expiry on September 30, 2014; and a six-year extension of the small travel promotion act fee on certain travelers to the US that was set to expire in 2015.

It was emphasized the offsets in the new Senate bill contain no new taxes or fees on US taxpayers or US businesses.

If Gillibrand and Schumer succeed in passing the modified legislation through the Senate, the House of Representative would need to pass the measure again with the new offsets. They are hopeful the House could be called back into session in that event. President Obama has indicated that he would sign the bill if it reaches his desk.

TAGS: compliance | tax | tax compliance | interest | royalties | law | fees | excise duty | agreements | legislation | withholding tax | United States | dividends

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