Senate Hearing on Profit Shifting
On April 1, the Senate Permanent Subcommittee on Investigations held another hearing on multinational corporations that actively reduce their worldwide tax burdens by shifting profits out of the U.S. Senators and witnesses disagreed as to whether the specific transactions that U.S. corporate taxpayers use to move income to entities outside the U.S. (to other entities in their worldwide group) should be subject to scrutiny or praised. Some senators even questioned the propriety of the hearing itself.
Unlike prior similar hearings that focused on IT companies, this hearing focused on domestic manufacturing companies. In the typical transactions, companies restructured their foreign operations so that non-U.S. subsidiaries organized in low-tax jurisdictions would pay the domestic operating subsidiaries a small markup in exchange for providing all of the services and support required to perform certain foreign sales, resulting in a significant amount of the profits being reported abroad as opposed to the U.S. Although the location of the profit-making activities did not change, in one cited case, this activity netted $2.4 billion in U.S. tax savings over a 12-year period. While a few senators and witnesses argued that these type of arrangements were unsupported by the tax law and should have been challenged by the IRS, many others argued that these arrangements complied with all relevant statutes, regulations, and case law, and in fact represented activities that reasonable businessmen and businesswomen should engage in as fiduciaries of the company.
While the subcommittee members argued that the real problem was a broken tax code, many suggested that different flaws were to blame. Republican members argued that the high corporate tax rate causes U.S. multinationals to move their activities offshore, and that the U.S. corporate rate needs to be reduced in order to maintain worldwide competitiveness. Democratic members argued that the rules regarding interparty and cross-border transactions need to be fixed so as to prevent income from domestic activities from being reported abroad. Due to disagreements about the appropriateness of subjecting any specific taxpayer to this type of public scrutiny and the egregiousness of the transaction at issue, the Republican members refused to sign onto the subcommittee's scrutiny of these taxpayers.
This type of congressional action seems to be the precursor to a meaningful debate that could result in a significant reduction in the U.S. corporate tax rate, or a change in the rules that would make is difficult for U.S. multinationals to move their operations, and hence profits, to non-U.S. group members located in jurisdictions that offer more competitive corporate tax rates. It is unlikely that any changes will occur before the 2014 mid-term elections in November, but depending on the outcome of those elections, the landscape upon which U.S. multinational do business could change significantly.
New FATCA Guidance
On April 2, the U.S. Treasury released Announcement 2014-17 under the Foreign Account Tax Compliance Act, sections 1471 through 1474 of the Internal Revenue Code ("FATCA"), broadening the scope of when an intergovernmental agreement ("IGA") is considered to be in effect and extending the registration timeframe for foreign financial institutions ("FFIs").
FATCA Overview. Pursuant to FATCA, beginning on July 1, a U.S. withholding agent (e.g., a U.S. person who is an obligor on a debt instrument issued after July 1 or an issuer of stock) will be required to withhold 30 percent of certain U.S. source payments (e.g., interest or dividends) made to an FFI (e.g., a non-U.S. bank or potentially a non-U.S. investment fund), unless the FFI (i) enters into an agreement with the IRS or is located in a jurisdiction that has entered into an IGA with the U.S., (ii) registers with the IRS and (iii) obtains a global intermediary identification number ("GIIN") that it provides to U.S. withholding agents, and satisfies or is exempt from IRS or other governmental reporting requirements with respect to U.S. account holders. For more information, visit Jones Day's website for our FATCACommentaries ("Six-Month Extension of FATCA Deadlines—Another Joy of Summer," July 2013; "Treasury Issues Proposed Regulations on the Information Reporting and Withholding Tax Provisions of FATCA," April 2012; and "New FATCA Proposed Regulations: Eased Deadlines but the System Moves Forward," February 2012).
Broadened Scope of IGAs. The IRS maintains a published list identifying all jurisdictions that are treated as having an IGA with the U.S. (Model 1 or Model 2), including those jurisdictions that have signed IGAs that are not yet in effect. Pursuant to Announcement 2014-17, the IRS list will be expanded to include jurisdictions that, before July 1, have reached agreements "in substance" on the terms of an IGA, though not yet signed, and have consented to be included in the IRS list. Such IGAs will be considered in effect from the date the jurisdiction provides its consent through December 31. The IGA list can be found here.
Extended Registration Timeframe for FFIs.Pursuant to final regulations under FATCA, an FFI must register with the IRS on the FATCA registration website and obtain a GIIN that appears on an FFI list maintained by the IRS. For FFIs in Model 1 (but not Model 2) IGA jurisdictions, GIINs are not required until January 1, 2015. Pursuant to Announcement 2014-17, the IRS has extended the FFI registration date to May 5 for an FFI that wishes to have its GIIN included in the June 2 FFI list, and to June 3 for an FFI that wishes to have its GIIN included in the July 1 FFI list. For planning purposes, please note that the IRS is expected to continue to publish additional FFI lists beyond July 1, and withholding agents that receive a Form W-8 indicating the payee has applied for a GIIN have 90 days to verify the GIIN against the published FFI lists.