Limitation on Treaty Benefits for Certain Deductible Payments
RSS Issue FeedBACKGROUND
Foreign companies are generally taxed on U.S. income that has a sufficient nexus to the United States, or is “effectively connected,” with the conduct of a U.S. trade or business. This income is generally subject to tax in the same manner and at the same rates as the income of a U.S. corporation. However, an applicable tax treaty may limit the U.S. tax foreign companies owe. Thus, tax treaties limit double taxation and remove barriers to commerce and trade.
In addition, foreign corporations are subject to a flat, 30% withholding tax on certain other types of income (interests, dividends, etc.) earned in the United States that is not effectively connected, but they can eliminate or reduce this tax under tax treaties.
Extensive provisions exist to prevent abuse of tax treaties. For example, treaties generally contain certain articles known as "Limitation of Benefits" provisions, to prevent treaty benefits in certain cases of treaty shopping or income stripping. This occurs when a corporation from a non-treaty country sets up operations in a country that is a party to the treaty in order to take advantage of the treaty provisions.
In past legislation, Congress has attempted to undo long-standing treaties, by enacting a treaty limitation provision that limits the tax treaty benefits relating to U.S. withholding tax on deductible related-party payments. Under this modification, the amount of withholding tax deductible under a U.S. treaty between related-parties may not be reduced unless it would have been reduced had the payments been made directly to the foreign parent corporation. A payment is a deductible related-party payment if it is made directly or indirectly by any entity to any other entity, it is allowable as a deduction for U.S. tax purposes, and both entities are members of the same “foreign controlled group of entities.”
While recent legislation included this treaty limitation provision as a revenue raising measure, this provision has not been enacted.
CHAMBER POSITION
The Chamber strongly opposes the tax on foreign-owned companies conducting business in the United States. This provision, which would raise taxes on foreign corporations that invest and create jobs in the United States, would discourage future foreign investment, override long-standing tax treaties, harm U.S. relationships with major trading partners, and possibly incite retaliation by foreign governments against U.S. companies operating abroad.
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