US acts to secure tax base by closing loophole

WASHINGTON • The Treasury Department sought to limit the benefits United States companies can claim when they pay taxes overseas, an effort to cushion the blow from Europe's demand that Apple pony up US$14.5 billion (S$19.8 billion) in unpaid taxes.

In a new guidance, the department tightened regulations requiring American businesses to bring foreign profits back home - a process known as repatriation - if they want to get credit for taxes paid overseas.

Treasury issued the rule last year to prevent companies from enjoying a foreign tax credit when the related profits remained offshore.

But businesses circumvented it by shifting money within their foreign subsidiaries, and Thursday's guidance is designed to end that practice.

The department said that it hoped the new notice would reduce corporate America's incentive to "take advantage of our broken international tax system".

Washington is worried that mounting international tax obligations will eat away at what's left for Uncle Sam.

"Today, we are closing another tax loophole that contributes to the erosion of our tax base," said Mr Mark Mazur, assistant secretary for tax policy at the Treasury.

It is the latest effort by President Barack Obama's administration to pin down the more than US$2 trillion in profits US companies hold overseas.

Unlike most developed countries, the US taxes businesses on profits generated anywhere in the world, and the bill is due once the money returns to American shores.

That has encouraged many companies to keep their international profits overseas to avoid the hefty 35 per cent tax rate at home.

For years, partisan gridlock has stalled attempts to encourage businesses to repatriate that income and fix the corporate tax code.

Meanwhile, Apple has amassed a cash stockpile of more than US$200 billion, most of it offshore. That Europe could get to it first is adding insult to injury for Washington.

The European Commission ruled last month that Apple's ultra-low tax rate on its operations in Ireland ran afoul of European Union rules that prevent member countries from offering excessive incentives to businesses.

Apple declined to comment on the new guidance. The company has been a flash point in the debate on business tax reform not only because of its household name recognition, but also because it is the single largest corporate taxpayer in the country.

European officials have also investigated other big names, such as Starbucks and Amazon, for possible tax avoidance.


A version of this article appeared in the print edition of The Straits Times on September 17, 2016, with the headline 'US acts to secure tax base by closing loophole'. Print Edition | Subscribe