USA / WTO: Offshore earnings tax rules set for change

The statement heralds significant changes to taxation of offshore accounts although details have yet to be published. Even so, the USA's tubthumping about offshore tax evasion is clearly not entirely based in the realities of the future tax schemes and the recent initiative to bring back offshore money seems potentially doomed. More, WTO will no doubt examine the plans for the EU to move to a system broadly comparable with that in the USA and the finance ministers there will be watching this development with interest. The plans for a USA style taxation system were kicked off at Tampere, Finland more than two years ago and followed up by a UK Treasury memo setting out a suggested scheme. Much of the recent tax information exchange debate has been fuelled by the demands for taxation of foreign income (as undertaken by Germany, for example) in place of the UK style system of taxation of domestic income only and taxation of foreign income only on repatriation.

A telling point about the US system, which the EU ministers might like to notice is elsewhere in the US Treasury statement: "The U.S. international tax rules can operate to impose a burden on U.S.-based companies disproportionate to the tax burden imposed by our trading partners on the foreign operations of their companies. The U.S. rules for the taxation of foreign-source income are unique in their breadth of reach and degree of complexity. That complexity itself represents a significant burden that should be addressed."

This will have a detrimental effect on the OECD's plans - there may be tax harmonisation but not with the bar where they have so far set it.

How far will the USA go? With the proposal put before Congress for an unprecedented (in recent times) budget deficit, there has to be questions over how far the Republicans will go to defeat measures that will further restrict revenue - and they can be assured of no support from the Democrats who will want to make sure that their revenues are as high as possible when they return to power. This might just be an election ploy and only minor changes result. Or it might result in the saving of the offshore industry with taxation falling only on repatriated profits: and, ironically, if that is the case then most of the arguments against information disclosure fall as then the only reason for keeping money secret from governments will be tax evasion as it is recognised in the majority of countries around the world. It will be interesting to see the sums when the debate starts.

US Treasury statement (extract)

Current Law

The United States, like several of our major trading partners, operates a worldwide system of income taxation. U.S. citizens and residents, including U.S. corporations, are taxed on all their income, regardless of where it is earned. Income earned from foreign sources potentially is subject to taxation both by the country where the income is earned, the country of source, and by the United States, the country of residence. To provide relief from this potential double taxation, the United States allows taxpayers a foreign tax credit that reduces the U.S. tax on foreign-source income by the amount of foreign income and withholding taxes paid on such income. A U.S. corporation generally is subject to U.S. tax on the active earnings of a foreign subsidiary if and when such income is repatriated as a dividend. However, under the subpart F rules, the U.S. parent is subject to current U.S. tax on certain income earned by a foreign subsidiary, without regard to whether that income is distributed to the U.S. parent.

The extraterritorial income exclusion (ETI) provisions, which provide a partial exemption from tax for income from certain foreign sales and leasing transactions, were enacted in 2000 to replace the foreign sales corporation (FSC) provisions of prior law. In January 2002, the WTO Dispute Settlement Body adopted a final report finding that the ETI provisions, like the prior-law FSC provisions, are inconsistent with WTO rules. The WTO has authorized the imposition of trade sanctions against U.S. exports up to the level of USD4 [milliard] per year.