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June 2, 2009
President Obama’sInternational Tax Proposals
Richard T. Pines
ARNSTEIN & LEHR LLP120 S. RIVVERSIDE PLAZA | 1200CHICAGO, IL 60606P 312.876.6925 | F 312.876.6276RTPines@arnstein.com
Richard T. Pines 
is of counsel in Arnstein & Lehr’s Chicago office. He concentrates his practice on business and business transactions. He specializes in international business,transfer pricing, securitization and supply chain structuring. Previously, he worked with 
 
Sears Holding Company for 37 years as a tax advisor. He was recognized by the National Retail Federation for his accomplishments at Sears, and is the past co-chairman of the National Retail Federation Tax Committee and American Corporate Counsel Association.
On May 11, 2009, the Treasury Department released the General Explanations of theAdministration's FY 2010 Revenue Proposals (referred to below as the “Greenbook”), providingadditional details with respect to, among other things, the international tax proposals announced(including seven new international proposals) by the president on May 4, 2009. Together, they raise$209.8 billion over 10 years. These proposals would: (1) reform the foreign income deferral rules tocurb investing overseas; (2) close certain identified foreign tax credit loopholes to more align thecredit to accomplish its original legislative intent; (3) strengthening the rules dealing with tax havens,including the current avoidance of subpart F rules; and (4) reforming the qualified intermediary regimeto combat the underreporting of U.S. tax through off shore accounts. If enacted, these proposalsrepresent a fundamental reform of longstanding international tax rules. But at this time they are justproposals.However, because of shortfalls in the White House budget and the perception that the internationalarena is an area in need of restructuring, most advisors believe changes will be made here or in abroader restructuring of the entire federal income regime. As to timing, as will later be discussed, itdoes not appear that any of these proposed changes will be made this year with health care (andother federal tax pay for proposals) and the environment receiving top priorities from theadministration. Nonetheless, companies need be currently apprised of what changes could happen inthe next few months and how they will strategically plan for those changes.According to the White House May 4 press release
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, the administration's plan is to reform U.S.international tax laws and improve their enforcement by ensuring that the tax code does not stack thedeck against job creation by reducing the amount of taxes lost to tax havens. The press release citesas evidence the for “the most recent year for which data is available, U.S. multinational corporationspaid about $16 billion of U.S. tax on approximately $700 billion of foreign active earnings – aneffective U.S. tax rate of about 2.3%.”As to the quote above, not everyone agrees with this assessment. In the cited article, it is stated; “Douglas S. Stransky, a partner with Sullivan & Worcester, the firm that sponsored the second annualWorld Wide Update, recently indicated that the White House Press release accompanying theproposals that U.S. multinationals have an effective US tax rate is misleading because it doesn’texplain how much multinationals pay on a worldwide basis. He also feels that the use of the word“loop holes” by both the administration and various lawmakers is perplexing, because many of theprovisions in the current tax laws have been in existence for decades. He also claims that the
 
 
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administration’s assertions that the proposals will create U.S. jobs perpetuate the myth that investingabroad destroys American jobs. He referenced one study by Harvard economists Fritz Folay andMihir Desai and by James Hines of the University of Michigan that estimates that for every 10%increase in U.S. multinationals’ overseas payrolls their American payrolls increase almost 4%.
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 From a tax policy perspective, many of the proposals contained in the Greenbook represent anexpansion of the extraterritorial reach of U.S. federal income tax rules. From a substantive point of view, these measures reflect and reaffirm the view that the United States has a continuing interest intaxing the foreign earnings of U.S. multinationals and in limiting opportunities to defer tax on suchearnings. In fact, many have argued that these changes will make U.S.-owned companies lesscompetitive and more vulnerable to takeovers. In fact, furthering the contrary arguments, manycountries seem to be heading in the opposite direction, proposing changes to make their domesticmultinationals more competitive. For example, the Canadian Minister of Finance’s Advisory Panel onCanada’s System of International Taxation has recommended that Canada expand its exemptionregime for income earned by foreign subsidiaries, with no new limitation on related deductions toCanadian shareholders.
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 On the other hand, University of Michigan Law Professor Reuven S. Avi-Yonah states an oppositeopinion indicating:
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 “The Obama plan for reforming U.S. international tax rules is incomplete, and it will no doubt bemuch amended in Congress. But it represents a crucial first step that is based on the realizationthat in our interdependent world, it is not possible to achieve either source- or residence-basedtaxation without the other form being effectively implemented and that without taxing cross-border income, all income taxation becomes impossible, because income taxation requires taxing capitaland capital is mobile across borders. If we want to preserve the income tax and retain someprogressivity in our tax system, the Obama plan should be enacted as soon as possible.
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 In March, a somewhat comparable international tax reform bill was introduced by Sen. Carl Levin, D-Mich., and by Lloyd Doggert, D-Texas. Tax analysts indicated in a May 21 article that some 60companies filed lobbying reports as a bill of interest.
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Included in this list are such well known namesas: Baxter Healthcare, Blackstone Group, Bristol-Meyers, Citigroup, Dow Chemical, Exxon Mobil andPepsi. The article concludes that many of these same companies will probably be following PresidentObama’s recent international tax reform proposals aimed at raising nearly $200 billion in revenue.
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 This could portend the effort and impact that the business community will want to have on thislegislation as it moves through Congress.While much discussion now centers on international tax proposals, one should not lose sight of themany other significant federal income tax changes proposed in the Greenbook – including the repealof LIFO and the codification of the “Economic Substance Doctrine.”
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While there was some initialdiscussion that some of the international tax proposed changes could pay for health care legislation,the Finance Committee’s initial write up did not include any such taxes. But in a recent Deloitte Webcast one speaker mentioned that a value added tax was being considered.
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Retailers would not bepleased with such a proposal, since the added tax burden could hamper sales.While the legislative outcome of these proposals is admittedly uncertain some companies are notwaiting. A May 27 Wall Street Journal article reports on Accenture in part stating: “On Tuesday, theconsulting and outsourcing firm said its board of directors had unanimously approved switching thecompany's place of incorporation from Bermuda to Ireland. The move comes amid a crackdown ontax havens by the Obama administration and congressional Democrats, who are targeting companieswith substantial U.S. operations that are incorporated in tax havens like Bermuda to lower their overall tax burden.” The article goes on to state:“In a trend that has gained momentum over the past six months, numerous U.S.companies are reincorporating from tax-friendly locations like Bermuda and the Cayman
 
 
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Islands to Switzerland and Ireland, in an effort to cope with what are expected to besignificant changes in how the U.S. taxes multinational corporations. …Many of thesecompanies have said taxes were a reason behind the move, but have also emphasizedother strategic reasons for the changes.Such moves could help companies preserve the tax benefits they had in Bermuda and theCayman Islands, while using Switzerland or Ireland's tax treaties with the U.S. to protect themfrom possible adverse legislation, according to tax experts who have advised companies on themoves. Bermuda imposes no corporate income tax. Switzerland has a corporate income tax, butdoesn't levy it on profits earned by subsidiaries overseas. Ireland also has a corporate income taxbut doesn't impose it on various intracompany transactions, thus making the tax relatively easy toavoid, say tax professionals.”
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 Other companies mentioned in the article apparently taking some action include: Tyco InternationalLtd., Foster Wheeler Ltd., Weatherford International Ltd., Transocean Inc., Covidien Ltd., andIngersoll- Rand Co.Finally, in a May 15 web cast by senior tax group from PwC
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, Jon Nagy explained to its audience thatthese initiatives must be taken seriously because of the depth and breath of the proposals and their consequent possible significant effects on financial statements. He indicated that their internationaltax group felt that something would be enacted and that there is an 18 month window to act beforethe effective date (June 2009) to December 2010). So the advice offered here was to do someplanning now – for to do nothing now would be a “big mistake.” Nagy recommended that UScompanies need to have their certain tax attributes identified,
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quantified and then modeled so adetermination can be made as to whether action need be taken before enactment date.Ken Kuykendall, from the same PwC web cast group, underlined the fact that a company’s treasurydepartment needs to be involved in the decision making, since there could be significant FAS109/APB 23 deferred tax liability issues to be dealt with for any planned action.
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Kuykendall alsonoted that some of these tax consequences may occur prior to effective date (on date of enactment)and that some companies are considering whether to make an MD&A disclosure should any of theseprovisions be enacted.There will be a discussion of some of the major proposed corporate changes affecting most U.S.companies with international operations, then some comments about secondary proposed changes(but important to certain industry groups), a brief comment about the proposals to reform the qualifiedintermediary regime to combat the underreporting of U.S. through the use of offshore accounts, arecap of transition issues that companies will face if any of the legislation is passed; and finally, abrief discussion on timing.
B. Major Proposals – Affecting All Taxpayers with International Operations
 
Tax Havens
: Here the president wants to revive Notice 98-11, 1998-1 C.B. 433. The aim of the noticewas to prevent multinational corporations from "abusing" the so-called "check-the-box option" byusing hybrid entities located in tax haven jurisdictions. This structuring option allows flows of passiveincome between controlled foreign corporations (CFCs) to disappear for purposes of the Subpart Frules. This structuring option allows flows of passive income between controlled foreign corporations(CFCs) to disappear for purposes of the Subpart F rules. Thus, it is proposed to treat certain foreignhybrid entities as corporations for U.S. tax purposes so that the subpart F rules would apply againand tax income that heretofore avoided U.S. tax. From a carve out standpoint, the ability of a foreignentity to elect to be treated as a disregarded entity for U.S. tax purposes would be restricted to casesin which either (a) the foreign entity is wholly owned by an entity organized under the laws of thesame foreign country, or (b) except in cases of U.S. tax avoidance, the foreign entity is wholly owneddirectly by a U.S. person. The proposal is estimated to raise $86.5 billion through 2019. The WhiteHouse May 4 press release
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provides the following (partial) explanation and example:
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