Federal Taxes for Some Corporations Quietly Hiked, Study Says

The Treasury Building is seen in Washington on May 4, 2021. Patrick Semansky/AP Photo

The Biden administration has recently bypassed Congress in raising taxes on multinational corporations, according to a Washington-based think tank.

The tax increase came recently through action by the U.S. Treasury and the IRS in establishing new foreign tax credit (FTC) rules, according to the Tax Foundation. A paper published by the think tank, “A Regulatory Tax Hike on U.S. Multinationals,” explains the changes in tax credits for multinational companies that reduce deductions and credits.

“The foreign tax credit regulations released at the beginning of the year represent a tax hike for many U.S. companies that earn profits from customers abroad,“ the paper reads. ”While the initial motivation for revising FTC rules was the adoption of digital services taxes (DST) in foreign jurisdictions, the final rules have impacts well beyond the DSTs.

“The new rules will lead to double taxation of U.S. companies and put them at a competitive disadvantage in some foreign markets.”

A spokesperson for the U.S. Treasury didn’t respond by press time to questions from The Epoch Times about the rules as published in the Federal Register in January.

In a 2021 speech, Treasury Secretary Janet Yellen argued for changes in international corporate tax rates.

“Competitiveness is about more than how U.S.-headquartered companies fare against other companies in global merger and acquisition bids,” Yellen said. “It is about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises and that all citizens fairly share the burden of financing government.”

She said the United States must raise the U.S. minimum corporate tax rate, “recognizing that it is important to work with other countries to end the pressures of tax competition and corporate tax base erosion.”

However, in a February letter, a U.S. industry group writing to the Treasury warned of the consequences of the new foreign tax credit rules.

The Alliance for Competitive Taxation (ACT) stated that the new rules “introduce enormous uncertainty in one of the most significant areas of tax law for globally engaged U.S. companies and one which, until now, has been among the most stable. The Final Regulations include numerous novel concepts and ambiguous terminology that will inevitably result in increased compliance costs, significant uncertainty, and protracted litigation with the Internal Revenue Service,” according to the ACT letter (pdf).

The ACT represents multinational corporations that include Coca-Cola Co., Exxon Mobil Corp., and Alphabet Inc.

“Taxpayers will need to analyze the intent of every deduction disallowance under foreign law to determine consistency with U.S. tax principles,” the letter reads. “Notably, neither this uncertainty nor any of these added compliance burdens will be faced by the foreign competitors of U.S. companies, with the result that U.S. companies and their workers will be less able to compete and grow in markets around the world.”

An analyst said the new foreign tax credit rules are a major policy change.

“This represents billions of dollars in revenue. This is something that should have been done through the House Ways and Committee or the Senate Finance Committee,” Daniel Bunn, Tax Foundation’s vice president for global projects and the author of the think tank’s paper, told The Epoch Times.

A former chairman of the Ways and Means Committee—the primary tax-writing committee of Congress—said he’s disturbed by the new rules, noting that they seem to ignore Congress.

“Congress sought to protect Americans from double taxation by providing a credit for foreign income taxes paid, and Treasury must remain focused on countering discriminatory taxes,” Rep. Kevin Brady (R-Texas), told The Epoch Times through a spokesman.

Brady, now the ranking Republican member of the committee, said he “is deeply concerned that Treasury’s new rules may not be sufficiently detailed and that they present major challenges to taxpayers already harmed by historic backlogs and delays from the IRS.”

“The Biden administration should work with Congress to ensure that it is implementing the law as Congress intended,” he said.

Bunn said that “this is also putting our companies at a competitive disadvantage with those countries where we don’t have a tax treaty.”

The new rule (pdf) reads in part: “I. Disallowance of Foreign Tax Credit or Deduction for Foreign Income Taxes under Section 245A(d).

“Proposed §1.245A(d)-1(a) generally provided that neither a credit under section 901 nor a deduction is allowed for foreign income taxes (as defined in §1.901-2(a)) paid or accrued by a domestic or foreign corporation that are attributable to specified distribution or specified earnings and profits of a foreign corporation.”

Bunn said the rules increase the difficulty for U.S. companies in seeking business in some African and South American countries. They affect many corporations that have or are aiming to conduct business with developing nations. That’s because the United States only has tax treaties with some 66 countries, most of them being in Europe, although there are a few in South America or Africa, according to the Tax Foundation.

“The new rules essentially penalize businesses that are doing business in a non-treaty country,“ the paper reads. ”The costs of doing business will rise because they will no longer be able to claim FTCs for taxes that do not substantially conform to the U.S. tax code. They will be taxed twice, once under a foreign withholding tax and again under IRS rules.”

Those U.S. companies affected are often construction or energy companies trying to obtain business in developing countries, the Tax Foundation wrote. These countries usually don’t have tax treaties with the United States.