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Overseas Companies Seek U.S. Tax Rewrite Minus Tougher Rules

Non-U.S. Companies Seek Tax Change Minus Earnings Stripping
Nancy McLernon, president and chief executive officer of the Organization for International Investment, said her members would fight attempts to impose new rules designed to limit earnings stripping. Photo: Andrew Harrer/Bloomberg

Companies based outside the U.S. such as HSBC Holdings Plc and SAP AG are lobbying Congress on an overhaul of the U.S. tax code with a different set of priorities than those of their U.S.-based counterparts.

Non-U.S. companies tend to care little about issues that have dominated the tax overhaul debate in Washington, such as discussion about the taxation of U.S. multinationals’ overseas profits. They join in the corporate consensus for lower tax rates and a simpler tax system.

Their most specific interest is preventing Congress from enacting tougher rules against so-called earnings stripping, which they would view as discriminatory taxation against non-U.S. companies. Earnings stripping is a tax technique in which U.S. subsidiaries of overseas companies use interest deductions to lower their taxable income and shift the profits to places where they are taxed lightly or not at all.

“We can’t budge on that,” Nancy McLernon, president and chief executive officer of the Organization for International Investment, told Bloomberg Government. The Washington-based trade group includes the U.S. arms of companies such as Heineken NV, Nestle SA, and Unilever NV.

The non-U.S. companies that McLernon represents soon will receive more attention. A House Ways and Means subcommittee is scheduled to hold a hearing tomorrow on the potential effect of changes in the tax code on foreign direct investment.

Treatment of Subsidiaries

McLernon will testify, along with Alexander Spitzer, a senior vice president at Nestle, and Claude Draillard, chief financial officer of Dassault Falcon Jet Corp., which is part of Dassault Aviation SA. Other witnesses include Gary Hufbauer, senior fellow at the Peterson Institute of International Economics, and Bret Wells, a law professor at the University of Houston.

In many ways, subsidiaries of non-U.S. companies are treated like their domestic counterparts under the U.S. tax code. They face the same 35 percent top tax rate, and they are eligible for deductions that helped reduce the average effective tax rate for large U.S. corporations to about 27 percent in 2008, according to the Congressional Research Service.

The potential changes to the code, which are being explored by the administration and by lawmakers, have prompted companies from around the world to lobby Congress. In addition to pushing for specific tax provisions, companies such as Siemens AG and Case New Holland Global NV, a subsidiary of Fiat Industrial SpA, reported in public filings this year that they are lobbying on the proposed overhaul. Spokesmen for Siemens, HSBC, SAP and Case New Holland either declined to comment or didn’t return a request for comment.

Attracting Investment

Major changes to the corporate tax code, along with enactment of the administration’s other economic priorities, would help attract more foreign investment, said Austan Goolsbee, chairman of President Barack Obama’s Council of Economic Advisers, during a June 20 conference call with reporters to promote international investment.

“All of those would be additional ways to incentivize the foreign direct investment,” he said.

The tougher question for lawmakers will be whether they can or should impose new rules on U.S. subsidiaries of foreign companies that are seeking access to the world’s largest economy. Companies trying to sell beer, chocolate, cars and soap want to reach U.S. consumers, regardless of the tax rate.

Minimum Level

Reuven Avi-Yonah, a professor of law at the University of Michigan, said he supports changes that would impose a minimum level of taxes on U.S. subsidiaries of companies based overseas to prevent them from lowering their U.S. tax rates too far.

“I don’t see Toyota or Honda pulling out of the American market if we impose more taxation on them,” he said. “The market is too important.”

McLernon said the most intense competition for investment that is most sensitive to tax policy occurs over corporate subsidiaries that manage global businesses and could be located elsewhere.

“These are the kinds of decisions that we miss out on because of the high marginal rate,” she said. “Those are the ones we can drive away.”

McLernon said members of her group would fight attempts to impose new rules designed to limit earnings stripping. The group’s lobbying clout helped defeat a 2007 attempt by Representative Lloyd Doggett, a Texas Democrat, to impose withholding taxes on certain cross-border payments by companies.

Separately, the Obama administration has proposed changes to the earnings stripping rules that would impose a higher burden on formerly U.S.-based companies such as Cooper Industries Plc and Noble Corp. that inverted themselves and became foreign-based.

The proposal cites a 2007 study by the Treasury Department that found “strong evidence” of earnings stripping among inverted companies, namely low U.S. profits. That same study didn’t find conclusive evidence of similar profit-shifting among non-inverted companies.

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