The accounting firm KPMG recently issued a public policy alert with respect to new international tax regulations that were introduced in May for Congressional consideration. According to the report:
Under existing U.S. tax rules, companies may defer paying taxes at rates as high as 35 percent on most types of foreign profits so long as that money remains invested overseas. The administration proposals are intended to reduce incentives to invest overseas so that companies would be more likely to invest in the United States. The potential consequences ofthese proposals include a significant increase in the financial accounting and cash effective tax rates of affected companies, accompanied by a corresponding reduction in net income and earnings per share.
The three proposals impact the deferral of U.S. deductions allocated to foreign-source income, reform foreign tax credit (FTC) rules through pooling, and modify the “check-the-box” rules, requiring certain foreign entities that were previously ignored for tax purposes to be classified as corporations.
Based on my discussions with KPMG tax partners, the practical impact of these proposed rules is negative in two important ways: First, companies will still be required to deduct expenses from foreign operations for book purposes but will not be able to deduct the majority of them for tax purposes, regardless of whether the income is repatriated or not. This effectively raises corporate taxes and will reduce corporate earnings and free cashflow for re-investment.
Second, and this is the part that should be of greatest concern to legislators and American business people, I do not believe that this legislation, if enacted, will achieve the intended objective (per KPMG) of reducing incentives to invest overseas. On the contrary, it will encourage corporations to both accelerate and permanently increase their investments overseas by divesting themselves of their foreign subsidiaries, selling them to foreign-domiciled intermediary corporations, and paying those corporations a margin for servicing the U.S. corporation’s continuing needs. In effect, the unintended consequence will be to permanently keep these assets offshore and make U.S. companies pay more to intermediaries for the same service, because it will still cost them less than paying the higher tax burden imposed by the Congress.
The abundance of risk capital during America’s technology bubble in 1999 and 2000 effectively financed the launch of the technology innovation ecosystems that now thrive in China, India, Singapore and other emerging (and increasingly robust) economies. Are we now going to change our international tax structure to further entrench the dependence of American companies on these emerging giants? The pursuit of short-term tax revenues as the expense of sound long-term industrial planning is yet another example of tunnel vision among Washington policymakers.
If you are involved with companies that do international business, please do the research, understand the implications, and contact your legislators in Congress and urge them to vote against this ill-conceived regulation. We must stop damaging America’s global competitiveness.
CLICK HERE to see the original White house document.