President Obama released his plan to raise $198.3 billion from 2011–2019 by overhauling international taxes, which will affect multinational corporations. When combined with further international tax reforms that will be described in the administration’s full budget proposal, the proposed international tax reform package would raise $210 billion over the next 10 years.
There are four major proposals as part of the president’s fiscal 2010 budget, which would not take effect until 2011:
1. Reform the check-the-box rules, which currently allow multinationals to choose how their offshore subsidiaries are classified for U.S. tax purposes. Multinationals (U.S. corporations with “certain corporations overseas”) would be required to report such subsidiaries as controlled foreign corporations (rather than as disregarded entities) on their U.S. tax returns, making them subject to Subpart F rules. This provision would raise $86.5 billion over 10 years.
2. Change to deferral—changing the rules for deductibility of foreign expenses. As proposed previously (in section 3201 of HR 3970 in 2007) by House Ways and Means Chairman Rep. Charles Rangel, D-N.Y., the proposal would require companies to defer deductions for expenses allocated to foreign income until that foreign income is repatriated to the U.S. and subject to U.S. taxes. However, President Obama would exempt deductions for research and experimentation expenses. Changing the deferral rules would raise $60 billion from 2011 through 2019 (while Rangel’s version with other international changes was projected to raise $106 billion in total).
3. Reform the foreign tax credit rules, including limiting cross-crediting and prorating foreign taxes over the taxpayer’s entire foreign income, including deferred income, neutralizing the effect of rate differentials. The reforms would ensure that a taxpayer’s foreign tax credit is based on the amount of total foreign tax actually paid on total foreign earnings. Further, a taxpayer would not be allowed to take a foreign tax credit for foreign taxes paid on income not subject to U.S. tax. This proposal would raise $43 billion from 2011 to 2019.
4. Strengthen the qualified intermediary (QI) system and increase international tax enforcement. The proposals would require withholding of between 20% and 30% tax on U.S. payments to individuals with accounts at non-QI foreign financial institutions, and would require taxpayers to identify themselves and demonstrate compliance with U.S. law before the withheld taxes would be refunded. The proposal would also establish a rebuttable presumption that any foreign financial account held by a U.S. citizen at a non-QI contains enough funds to require TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), to be filed, and that a failure to file an FBAR is willful if the account has a balance greater than $200,000 at any time during the year.
The proposal would give the Treasury Department the authority to allow a financial institution to be a QI only if all commonly controlled financial institutions are also QIs. It would require QIs to report information on their U.S. customers to the same extent as U.S. financial intermediaries. It also would require U.S. investors to report on their tax returns transfers of money or property made to or from non-QI financial institutions, and it would strengthen information reporting requirements for financial institutions on transactions that establish a foreign business entity or transfer assets to and from foreign financial accounts on behalf of U.S. individuals.
Increase penalties for failing to report overseas income. The Administration would double certain penalties when a taxpayer fails to make a required disclosure of foreign financial accounts.
Extend the statute of limitations for international tax enforcement. The administration would increase the statute of limitations on international tax enforcement to six years.
Increase international tax enforcement. The IRS would be provided funds to hire 800 new employees for international enforcement efforts.
The QI and additional three enforcement proposals would raise $8.7 billion over 10 years.
In exchange for these rules, the president’s plan would permanently extend the research and experimentation tax credit, at a cost of $74.5 billion over 10 years.
More details on these proposals are available at the Treasury Department’s Web site, and additional information will be forthcoming. The tax-writing committees in Congress will then consider and study the issues. The AICPA International Tax Technical Resource Panel will also continue to monitor and analyze these proposals.
Eileen Reichenberg Sherr, CPA, M. Taxation, is a senior manager with the AICPA in Washington. Her e-mail address is email@example.com.