Congress May Close International Tax Treaty Loophole

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As discussed in the previous article, Congress may close the "carried interest" loophole to help pay for the "tax extenders," which are provisions extending several expiring tax breaks that mostly benefit business. Another measure that Congress may also use to help pay for the tax extenders is a provision that would stop corporations from manipulating tax treaties between the U.S. and other countries to avoid withholding taxes before shifting their income into a tax haven.

U.S. subsidiaries of foreign corporations don’t have to pay withholding taxes on passive income if they are based in a country that has a treaty with the U.S. allowing that country to have the sole taxing power. But corporations based (on paper at least) in a non-treaty country can shift profits from a U.S. subsidiary to another subsidiary in a treaty country and then shift them to the parent corporation in the non-treaty country, ensuring that they are never taxed.

Congress may adopt a provision (which was originally proposed by Rep. Lloyd Doggett of Texas) that would simply impose the withholding tax that would apply if the payment was made directly to the parent company in the non-treaty country in that situation. This would prevent treaty shopping and raise $7.7 billion over ten years.

Read CTJ's 2007 report explaining the proposal when it was proposed by Rep. Doggett.

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