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Doggett Law Will Erode US Tax Competitiveness

by Mike Godfrey, Tax-News.com, Washington

22 August 2007


Multinational companies with subsidiaries in the United States have expressed alarm at new legislative proposals that aim to tax companies which use tax treaties to mitigate tax when transferring money from US subsidiaries to foreign parents.

The proposal, introduced by Rep. Lloyd Doggett, a Texas Democrat, and added to unrelated measures in an agricultural bill, is intended to stop foreign multinationals from dodging US taxes by structuring transactions via the most favourable of the United States's double tax treaties, a process known as treaty shopping. However, business lobbyists argue that such transactions are a legitimate way of mitigating tax, and have warned that the bill is only serving to reinforce the growing perception that the Democrat controlled US Congress is pro-tax and anti-business.

"These companies are not doing anything illegal," Rhian Chilcott, the US Director of the Confederation of British Industry, announced in a BBC report. "They are taking advantage of a tax treaty which the US has negotiated."

Chilcott went on to warn that the proposals would "go a long way to undermine people's confidence in the US as a place to invest". This was a view shared by an executive at a global company with US factories, who told the UK's Financial Times that: “This is another signal that the US is not a friendly place to do business.

"We do not need this. We can go to Canada or Mexico," the executive added.

If enacted, the proposal would be most damaging to companies with a presence in the US, but which are based in a country which has not signed a double tax avoidance treaty with the US. At present many of these companies, such as South Korea's Samsung, use subsidiaries based in third countries with a favourable tax treaty with the US to reduce tax when transferring out income, but the Doggett bill could see these transfers taxed at 30%. According to the FT, Samsung is able to make tax-free transfers from its US operations to its financing unit in the UK thanks to the terms of the US/UK tax treaty.

In total it is estimated that the new law could cost companies US$7.5 billion in extra tax over ten years.

The proposals are due to be considered when Congress returns from its recess next month, but they have also generated much opposition from Republican lawmakers, who have warned that 5 million jobs at foreign firms' US subsidiaries are at risk. They contend that the provisions would make the US a less hospitable place to do business, discourage future investment, and drive jobs abroad.

Republicans have also suggested that the measure will open the way for retaliation on US companies operating on foreign soil, because they are part of numerous treaties that allow reciprocal treatment on taxes for US companies with foreign subsidiaries to avoid double taxation.

A comprehensive report in our Intelligence Report series looking at Tax-Effective Global Manufacturing and Financing Structures is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report8.asp

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