New Tax Proposals Aimed at Foreign-Owned Businesses

On June 6, 2002, in response to Congressional concerns relating to so-called “inversion” transactions, the US Treasury Department proposed several tax measures that could have significant adverse effects on foreign-based businesses operating in the United States.  Among these are (1) proposed statutory changes restricting the extent to which US businesses can deduct interest payments to, or guaranteed by, foreign affiliates, (2)  a tax treaty initiative that will likely result in reduced treaty benefits to non-US investors, (3) regulatory and other administrative rulemaking to tighten the taxation of services provided, and intangibles transferred across borders, including cost-sharing agreements, and (4) a review of the taxation of insurance companies that will examine the desirability of increasing the tax on foreign-based insurers. 

The proposals relating to interest deductions are the most specific and legislation on this point may be introduced before the summer Congressional recess. The other items will likely take longer to develop, but their impact may be far-reaching, particularly the initiatives on treaties and the cross-border transfer of services and intangibles. 

Foreign-based clients are advised to determine the extent to which these proposals may affect their particular situations and take appropriate action. Such action might consist of determining potential vulnerabilities in existing financing, cross-border service and cost sharing arrangements and/or helping to shape the proposals to mitigate their adverse impact. 

For further information, or for assistance in determining what action, if any, would be appropriate, please contact Phil West at 202.429.6247 or Stan Smilack at 202.429.6464.