Kevin Brady, Republican chairman of the House ways and means committee, gives details about the tax reforms on Thursday © Bloomberg
Big multinationals would be hit by a crackdown on tax avoiders that shift corporate profits out of the US under an obscure provision of the radical tax reforms unveiled by Republicans this week.
Company lobbyists who initially cheered the plan to slash the corporate tax rate from 35 per cent to 20 per cent were on Thursday night growing anxious over an anti-avoidance provision that they warned could cause wider collateral damage.
Their concerns illustrate the challenges facing Republicans as they try to overhaul the tax code for the first time since 1986, reckoning with corporate lobbying, budget constraints and President Donald Trump’s demand for a bill he can sign by Thanksgiving.
Bret Wells, a tax expert who recommended anti-avoidance measures to Congress last month, said they would hurt two groups of businesses: foreign-owned multinationals with American affiliates, and US companies that used “inversion” deals to move their head offices overseas.
The Republican tax plan would impose a 20 per cent “excise tax” on payments between affiliates of the same company, payments which are commonly made as international divisions trade materials, services and royalties for intellectual property.
“Yes, we have a new design to stop inbound, unwarranted deductions of expenses,” said Kevin Brady, the chief Republican tax writer in the House of Representatives, in response to a question from the Financial Times.
Without explicitly adopting Mr Trump’s “America first” rhetoric, Mr Brady, chairman of the House ways and means committee, has been pushing for ways to end perceived advantages he says the current tax code gives to foreign companies versus US corporations.
The excise tax would raise $155bn over 10 years, according to Congress’s joint committee on taxation, curtailing what Republicans call the “erosion” of the US tax base and helping to pay for the sharp cut in the headline corporate tax rate.
Mr Wells, a professor at the University of Houston, said: “It’s a fairly expansive provision in the way it’s contemplated.” He estimated that at present some companies could use tax-deductible payments between affiliates to shift as much as 30 to 40 per cent of their profits out of the US.
Lobbyists dispute the characterisation of multinationals as tax avoiders, arguing that such payments — also known as related-party transactions — are a legitimate and necessary part of internal supply chains that span the globe.
Nancy McLernon, president of OFII, a trade group for foreign companies in the US, said: “We’ve got to be very careful as we craft major tax legislation that might disproportionately impact international companies because US companies can be hit by retaliatory measures as a response.”
The Republican excise tax would have a limited effect on US tech companies. Although they use IP royalties to shift profits out of the US, their ability to do so is constrained by a provision of existing law that does not apply to foreign-owned companies.
One lobbyist said the excise tax would affect other US businesses, arguing it would hit carmakers importing components from their own factories in Mexico and retailers bringing in clothing from affiliates in China.
He said it recalled an earlier Brady proposal for a levy on imports — a border adjustment tax — which was killed by an outcry from importers. “In my view this is a border tax-lite proposal because you are taxing material being brought in to be sold in the US,” the lobbyist said.
A summary of the excise tax proposal from Mr Brady’s committee says “current law incentivises and subsidises the shift of American jobs overseas because additional functions performed abroad allow for greater deductible payments from US corporations to their foreign affiliates”.
It continues: “The provision would eliminate the US tax benefit afforded to multinational companies . . . by imposing full US tax on those profits irrespective of where they are booked.”
Mr Brady said the excise tax was “one of the areas we invite the most feedback in, because it’s a combination of some traditional ideas that have been talked about in the past with some new approaches”.
The Republican bill, which House speaker Paul Ryan says will also save money for middle-class families, is due to be amended by lawmakers next week before a vote in the House. If it passes, it will then go to the Senate, where members are likely to want to make their own revisions.
OFII and other trade groups said they were still evaluating the impact of the bill as a whole.
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