The Treasury Department today sent to Congress a Congressionally mandated report on three international tax issues. From the press release:
The Report to the Congress on Earnings Stripping, Transfer Pricing and U.S. Income Tax Treaties (108 pages) describes current issues regarding U.S. earnings stripping rules, transfer pricing rules, and the misuse of income tax treaties to which the United States is a party. The report provides conclusions and recommendations in each of the three areas studied.
Study on Earnings Stripping. The focus of the earnings-stripping study is on excessive payments of deductible interest by foreign-controlled U.S. corporations to related persons in whose hands that interest is partially or fully exempt from U.S. tax . While the study notes that it is not possible to quantify accurately the extent of earnings stripping generally, strong evidence exists of earnings stripping by foreign-controlled domestic corporations that have undergone so-called "inversion" transactions, in which the U.S. parent company of a multinational corporate group is replaced with a foreign parent in a low-tax or no-tax country….
Study on Transfer Pricing. The transfer pricing study focuses on issues relating to the shifting of income from the United States through transactions between related parties. The study reviews Treasury regulatory guidance under § 482 and the effectiveness of current transfer-pricing rules and compliance efforts to ensure that related-party transactions cannot be used to shift income out of the United States improperly. …
Study on U.S. Income Tax Treaties. The study on U.S. income tax treaties focuses on the need to prevent third-country residents from inappropriately obtaining the benefits of U.S. income tax treaties, in particular by achieving inappropriate reductions in U.S. withholding taxes. The study notes that in recent years interest payments have surged from foreign-controlled U.S. corporations to related parties in countries that are a party to a U.S. tax treaty with no "limitation on benefits" (LOB) provisions and that provides significant reductions in withholding rates. Such exploitation of those treaties without anti-treaty shopping protections confirms (1) the LOB provisions in other U.S. agreements appear to provide significant deterrence against abuse, and (2) the Treasury Department must continue its ongoing efforts to revise treaties with no or inadequate LOB provisions. …
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