THE UNITED STATES TEMPORARILY SHELVED RULES THAT WOULD HAVE MADE IT HARDER FOR US MULTI-NATIONALS TO “STRIP EARNINGS” from other countries

THE UNITED STATES TEMPORARILY SHELVED RULES THAT WOULD HAVE MADE IT HARDER FOR US MULTI-NATIONALS TO “STRIP EARNINGS” from other countries

September 01, 1999

A multinational corporation can usually reduce its tax base in another country by having its subsidiary in that country pay out earnings in a deductible form. An example is where earnings are paid to the parent as interest or rents. The challenge for US multinationals is to do this and still be able to defer US taxes on the income. US tax deferral is possible only on “active” income and not “passive” income like dividends, interest or rents.

One way around this problem until recently was to make the subsidiary in the country into a “disregarded entity.” The subsidiary is not considered to exist for US tax purposes. Therefore, a loan across the border to the company does not exist either. Neither do the interest payments on the loan.

The US Treasury issued proposed regulations in July to deny US tax deferral in such situations, but said the regulations would not be issued in final form before July 1, 2000 and would not be enforced for another five years after they become final.

The Treasury had planned a tougher approach but retreated under pressure from Congress. Treasury officials despair in private about ever being able to enforce the proposed rules.

Keith Martin