THE UNITED STATES IS RETHINKING WHEN US MULTINATIONALS should be allowed to defer US taxes on foreign earnings

THE UNITED STATES IS RETHINKING WHEN US MULTINATIONALS should be allowed to defer US taxes on foreign earnings

January 01, 1999

The current rules date back to 1962. Donald C. Lubick, the assistant Treasury secretary for tax policy, told a tax audience in December that the government is in the initial stages of a comprehensive review. Many of the rules are out of date. Lubick said the review should be completed by summer, and everything is on the table.

Many US multinationals set up offshore holding companies in tax havens to receive earnings from foreign operations and redeploy them abroad. US taxes are deferred as long as the earnings remain offshore. However, this strategy works only to the extent the holding company receives “active” income, like revenue from electricity sales, rather than passive income, like interest or dividends. The companies take pains to ensure that all entities below the holding company are transparent for US tax purposes to preserve the character of income as active as it moves up the ownership chain.

Meanwhile, Stuart LeBlang suggests in a long article in Tax Notes magazine that there be some easing of current rules to make it easier to defer US taxes, but on condition that offshore holding companies be required to repatriate at least a minimum percentage of their earnings each year to the US where the earnings would become subject to tax. LaBlang worked until recently in the international tax policy office at Treasury.

Keith Martin