India need not respond too readily to US TAX CODE CHANGE

SEVERAL MULTINATIONAL CORPORATIONS (MNCs) in the US that invest and create jobs overseas have begun lobbying against American President Barack Obama’s proposal to end their tax incentives. These firms hope to scuttle proposals on the sweeping changes in the US tax code, but their lawyers are advising them to gear up for any eventuality.
If Obama’s proposals go through, it would mark an end to tax-deferrals. US firms with foreign subsidiaries will not be able to claim a deduction for their expenses when they do not pay taxes on their profits in the US. They will also find it tough to take credit against their US taxes for foreign taxes paid on overseas profits.

More importantly, these firms cannot make their foreign subsidiaries disappear for tax purposes if the proposed reforms in check-thebox- rules — that allows them now to legally shift incomes of their subsidiaries to taxhavens — are implemented. These subsidiaries will then have to be considered as separate corporations for US tax purposes.

Tax experts admit that reforms in the deferral rules may have a rationale, but it will reduce the investment power of US multinationals. “The liberal regime helped US companies expand and grow worldwide. In a globalised world, it would be imprudent to assume that these proposals will prompt US companies to shift the jobs back home. Locational savings is a huge consideration for US companies outsourcing manufacturing and service operations. In the current state of the economy, companies will feel the pressure from their investors to optimise costs. Each government has to take a balanced approach to its tax policy. It must not hinder business and at the same time not sup-port blatant abuse of its tax incentives”, said Shefali Goradia, Partner, BMR Advisors.

The US administration, however, reckons that MNCs enjoy an unfair deal compared to firms operating only in the US who pay an overall tax of 40% on their corporate profits. The effective tax rate of MNCs, in contrast, was a mere 2.3% in 2004. They paid only $16 billion of US tax on $ 700 billion of foreign exchange earnings. US law firm Alvarez & Marsal, for instance, is ready with a list of dos and don’ts for these firms to brace up for a new tax regime. It has asked clients to give top priority to allocation and apportionment of all expenses. More so, for interest expenses that is seen as one of the most significant factors in inefficient foreign tax credit utilisation. One view is that it may be more favourable to carry debt at the subsidiary level than the parent company level. MNCs have also been advised to assess their holding company structures and exercise greater caution before making new check-thebox elections. A right mechanism to track earnings and profits of their subsidiaries is also a must. Any callousness could push the effective tax rate to 70%, say tax lawyers.

Source: Economic times