NEW YORK-A fire storm has erupted among corporations and legislators over Internal Revenue Service proposals released last month aimed at curtailing overseas transactions the agency believes are designed primarily to avoid U.S. taxes.
In its latest salvo, the IRS has set its sights on hybrid branches, which are part of so-called controlled foreign corporations based in the United States. The agency seeks to prevent American multinational companies from using hybrid branch arrangements to reduce their foreign taxes while, at the same time, reducing their domestic income that would be subject to U.S. taxes.
Wireless carriers and manufacturers increasingly are serving the global marketplace as foreign countries privatize their telecom networks and as U.S. companies expand their systems.
The proposed new rules would apply only in cases where the result is that the foreign tax on the hybrid entity is significantly lower than the U.S. rate.
In February, the IRS issued Notice 98-11, advising of a pending rule making to further its plan to crack down on this type of abuse.
“This is a notice with broader impact than 98-5, and we are trying to set up coalitions to lobby Congress not to let the Treasury go forward with this. Most of us think this is beyond the pale,” said Thomas J. Rasmussen, international tax advisory partner for Deloitte & Touche L.L.P., New York.
“These are totally legitimate transactions that are entitled to a deduction in a jurisdiction with a low income tax.”
Notice 98-11 came out on the heels of Notice 98-5, which the service published in January. The earlier notice announced that the IRS seeks to crack down on transactions domestic companies engage in, not so much to gain economic advantages overseas but primarily to obtain foreign tax credits that will reduce their domestic tax bills.
Besides Deloitte & Touche, other large accounting firms, including Ernst & Young and Price Waterhouse L.L.P., also have established industry coalitions to lobby against the IRS proposals.
Apparently, these coalitions have gotten the attention of at least two members of Congress, Rep. Bill Archer, chairman of the House Ways and Means Committee, and Rep. Charles Rangel, ranking Democrat on the same committee.
In letters to Treasury Secretary Robert E. Rubin late last month, both congressmen said the notices create uncertainty for American corporations that undermines their international competitiveness.
Rangel called for the IRS to make any regulations it issues prospective, rather than retroactive, unless there are “circumstances involving clearly defined abusive transactions where [retroactivity] may be appropriate …”
“The open-ended nature of these notices (95-5 and 95-11) has created significant uncertainty for existing business arrangements and raised serious confusion as to how U.S. multinationals are to proceed with normal business operations and planning … These companies are being asked to conduct their businesses without knowing tax consequences. This is unfair and harmful to U.S. business interests.”
In their letters to Treasury Secretary Rubin, Archer and Rangel also said the IRS and the Department of the Treasury appear to have overstepped their bounds by using administrative orders to create tax policy, which is the prerogative of the elected Congress. However, neither congressman said the IRS proposals to crack down on perceived tax abuses were necessarily incorrect.
Archer, referring specifically to Notice 98-11, phrased it this way: “Our international tax regime has long involved a balance among various policy objectives. The continuing wisdom of that balance, in light of events that are transforming in the global economy, should be the subject of serious and thoughtful debate.
“The Treasury Department apparently believes these changes are warranted. Many others, however, believe that such changes not only are inconsistent with sound tax policy, but also would undermine our nation’s ability to compete in world markets.”
Saying that such issues should be resolved through law rather than administrative decrees, Archer called on the Treasury Department to “submit a comprehensive and detailed legislative proposal reflecting your specific policy objectives in this area … accompanied by a detailed economic and tax policy analysis of the proposed … change and the ramifications for the ability of American businesses to compete in world markets.”
Meanwhile, the IRS has scheduled a public hearing on its proposals July 15 at its offices in Washington, D.C.
