Overview of International Tax in 2013

Tax Professionals' Resource
March 8, 2013 — 1,527 views  
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International tax is an issue about which the U.S. administration has been discussing for quite sometime. The need for international tax law reform has been intensely discussed. This is primarily because the benefits of income from a U.S. company with offshore subsidiaries do not always percolate to the country. The benefits of income usually accrue to the foreign jurisdictions with lower tax rates. With the reforms of international tax 2013 in place, the U.S. companies would be motivated to invest within the country. The Government wants to plug international tax loopholes against tax evasion. The current international tax law in the U.S. makes it possible for the companies to evade tax.

Foreign Income Deferred and Interest Expenses Deduction

The current law makes it possible for the U.S. companies operating offshore to deduct expenses involved in foreign investment immediately, as some or even all of the incomes from a foreign source are not subject to taxation. Yet, they are allowed to defer tax payment against investment profits until the profits are repatriated. The current international tax 2013 proposal might change this rule. The companies may not be able to claim the deductions, unless they pay tax on overseas earnings. This proposal limits or nullifies deferral benefits as it raises the cost of delaying tax payments on foreign earnings.

Income Shifting by Companies

Currently, intangible property transfer makes it possible to inappropriately shift income outside the United States. The Government has offered two different strategies against it. According to the first proposal, a scrutiny of the income from transfer of intangible property such as a patent, would take place. If a shift of income to a nation with low tax is detected, then the excessive return will come under the purview of taxation, and deferral would be denied. The second proposal aims at strongly regulating the laws on pricing transfer. The meaning of property that is intangible would be clarified under this proposal. The taxation officer will have the discretion to evaluate multiple properties, which are intangible to achieve a result that is more reliable.

Foreign Tax Credits

The current year’s international tax proposal attempts to close foreign tax credit loopholes. Under the present law, tax paid to foreign taxation agencies can be credited against the domestic tax liabilities. The credit is available on income that is taxable in the U.S. This provision has been abused by the MNCs. These companies have manipulated the law to claim credits against foreign taxes on income, which are not taxable in the U.S.

According to the proposal, cross-crediting actions could be curtailed by determining foreign tax credits on the basis of all foreign earnings and profits, and not on profits for which tax has been paid in the U.S. The proposed changes to international tax laws may successfully address the current administrative concerns on deferral, income shift to a country with low tax, and foreign tax credits. The companies may not claim income from foreign source, when the income is earned within the country.

The Government hopes to curtail or limit the international tax avoidance through these measures. Further, the U.S. corporations may not have enough incentive to invest overseas once these proposals are enforced. Additionally, these proposals in combination may raise about $150 million within the U.S. over the next ten years.

Tax Professionals' Resource