Senators Drop Tax Item Affecting Foreign Companies

Foreign-based multinational corporations won a victory in the U.S. Congress as senators agreed to drop a provision targeting some cross-border transactions from legislation that could pass before year’s end.

Senator Kirsten Gillibrand, a New York Democrat, and others removed the tax provision from legislation to provide health benefits for workers who responded to the Sept. 11, 2001 terrorist attacks. The senators omitted the language in an effort to win Republican support to advance the measure, Gillibrand spokesman Matt Canter said today.

The bill will move forward with another revenue-raising provision, which focuses on U.S. government payments to foreign- based contractors. The Senate plans to consider the bill after it completes work this week on an arms-reduction treaty with Russia, said Regan Lachapelle, a spokeswoman for Senate Majority Leader Harry Reid, a Nevada Democrat.

The House twice passed the tax treaty provision to pay for unrelated programs. The provision would have required companies based in countries that lack tax treaties with the U.S. to pay a 30 percent withholding tax on certain payments made to subsidiaries in countries that have tax treaties with the U.S.

Under the proposal, a company based in Brazil -- which doesn’t have a tax treaty with the U.S. -- would be unable to take advantage of the treaty between the U.S. and the U.K. to avoid the tax on payments made to its London-based finance subsidiary. Other jurisdictions that lack tax treaties include Bermuda, Singapore and Saudi Arabia.

Treaty Network

The provision, first sponsored by Democratic Representative Lloyd Doggett of Texas, would have damaged the tax treaty network, said Nancy McLernon, president of the Organization for International Investment, a Washington-based group that represents foreign-owned companies operating in the U.S. She said she was concerned that Congress could revive the idea.

“Unfortunately, this is a provision that gets trotted out there because it seems that it is noncontroversial, because it’s marketed as targeting countries without tax treaties,” McLernon said.

One company that has lobbied Congress on the bill is SABIC Innovative Plastics LLC, according to congressional disclosure records. The petrochemical firm, which makes resins used in medical devices, automobiles and toys, is owned by Saudi Basic Industries Corp. A company spokeswoman didn’t return a call seeking comment Monday afternoon.

Network Gaps

Michael Miller, a partner at the law firm Roberts & Holland who specializes in international taxation, said some companies were taking advantage of gaps in the treaty network. He cautioned, though, that the provision was overly broad.

“It’s hard to find a sufficiently coherent explanation of what the provision is designed to address and tie it together to how this provision operates,” he said.

Miller said the U.S. Treasury Department, which negotiates tax treaties, has been adding provisions to existing and new tax treaties designed to prevent companies from engaging in such treaty-shopping transactions.

Doggett, who authored the provision, said on the House floor earlier this year that it would affect only a small fraction of foreign investment in the U.S.

“The only people that it affects are those who have chosen to go to non-tax-treaty countries, mainly tax havens -- people that have avoided paying their fair share and are foreign-owned corporations,” he said.

Excise Fee

The new provision added to the 9/11 bill would impose a 2 percent excise fee on goods or services sold to the U.S. government by a foreign-based corporation or an individual based in a country that isn’t a member of the World Trade Organization’s Agreement on Government Procurement, according to a bill summary from Gillibrand’s office.

“The primary target would be China, India, Thailand, Malaysia and Brazil,” said David T. Ralston Jr., a Washington- based partner with Foley & Lardner LLP who works in procurement law. “Those are the leading countries that provide worldwide goods and services and are not signatories to an international trade agreement to the U.S.”

Prime contractors overseas may try to find a way around the fee by signing on as a subcontractor, said Scott Amey, general counsel for the Project on Government Oversight in Washington.

Federal contracts with vendors that have addresses registered outside the U.S. totaled $22 billion in fiscal 2009, according to data compiled by Bloomberg News.

With assistance from Alex Kowalski in Washington.

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net Sophia Yan in Washington at sophiayan@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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