Thursday, December 17, 2015

More on the international tax extenders

According to the Committee for a Responsible Federal Budget, the 10-year revenue cost of making the "active financing" exception permanent is $78 billion, whereas 5-year extension of section 954(c)(6) costs "only" $8 billion.

Obviously, the low-hanging fruit here (especially given the overall ten-year revenue cost of $680 billion on the tax side, or $830 billion for tax plus spending changes) is its showing that almost no one in Washington, and certainly not the Congressional Republicans whose majority status put them in the lead in bipartisan negotiations, actually cares in the slightest about budget deficits and public debt.  Whatever the real merits of deficit and long-term debt concerns, on which reasonable minds differ, it's clear that, in the political sector, yelling about it is purely a partisan sham to harry the other side and discourage the enactment of particular tax or spending proposals that one dislikes on other grounds.  But again, this has been too blindingly obvious for too long to count as much of a revelation.

Turning back to the international tax provisions, it's interesting to note that, even if section 954(c)(6) ends up being extended through the full 10-year period, and even assuming rising annual revenue costs, it would still presumably be less than 25% as costly as the active financing rule. I would assume that this reflects section 954(c)(6)'s redundancy, in many cases, given the general availability of tax planning that uses "hybrid entities" or "hybrid financial instruments."

I would expect a significantly higher marginal revenue cost of extending section 954(c)(6) if the Treasury addressed hybrids, including those created by its 1997 check-the-box regulations.  By the same token, the revenue effect of addressing check-the-box would be much higher absent section 954(c)(6).  But admittedly, even if both were addressed, there's a basic conceptual challenge that revenue estimators face in this area. Since both hybrids and section 954(c)(6) empower foreign-to-foreign tax planning, aiding the elimination of foreign taxes once multinationals have characterized their global profits as foreign source for U.S. tax purposes, it's tricky to determine just how much the companies' foreign taxes, as opposed to their U.S. taxes, would eventually go up in the new equilibrium.  And while I know that revenue estimators do their best with this, and may have useful data that they can draw on (especially for short-term estimating purposes), I do think there's potentially a big uncertainty here, especially once the companies have fully adjusted.

1 comment:

Wanda Hanson said...

Interesting take on International Tax Extenders. Similar to all tax codes my husband and I find the language incredibly jumbled and hard to decipher. As April 15th fast approaches, every resource is really helpful, so safe to say I really enjoyed your blog. Have you been to Tax-Tiger.Com? Is a really helpful resource for all things Tax.

Wanda Hanson @ Tax-Tiger