US tax hammer not so painful
Victor Katheyas
Sat, May 09, 2009
The Business Times

BUSINESSES and investors should not fret too much about proposed changes to the US tax regime, says an American academic.

In Singapore for the 8th Annual Darden International Finance Conference on 'Major Players in Emerging Markets', Robert Bruner, dean of the University of Virginia's Darden School of Business, said that 'businesspeople and investors are very, very inventive' and will find ways to handle the changes.

At present, foreign earnings of American firms are only taxed by the US taxman upon repatriation to the country. This allows firms with operations abroad to defer the tax liability on their foreign earnings indefinitely.

It is understood that the Obama administration believes these deferrals are, in effect, loopholes, and has proposed revisions to the tax code that would disallow such practices.

Tax analysts here have told BT such revisions could potentially affect Singapore significantly, with one saying that tax incentives for US firms to set up regional headquarters here could lose their lustre.

Prof Bruner, however, does not see things that way. For instance, US companies could re-establish foreign operations in ways that make them 'true foreign entities', rather than entities that are owned by an American parent, he said.

'For instance, a spin-off - partially or a majority-interest spin-off - to foreign investors, could well establish the principle that these operations are not owned (by the American parent company) in some legal sense.'

It may then be possible to 'trade business among entities in ways that cause the cashflows to be recognised as genuinely foreign cashflows rather than cashflows that are circulating through this corporation headquartered in the US,' he said.

'The opportunities for meeting the letter of the law and yet avoiding taxes are numerous.'

In any case, it is unlikely that such revisions will get the stamp of approval of US lawmakers easily, he said.

Members of the US Congress will feel some pressure to pass the legislation, Prof Bruner said. This will be from constituents concerned about job security and angered by corporate excesses - 'a populace that has become increasingly populist'.

Still, he believes that pleas by American companies - many of which would face about an 8 per cent rise in their overall tax burden, according to tax analysts at Deloitte in the US - would not fall on deaf ears.

'Even though a liberal Congress and liberal Senate might be prone to supporting legislation like this, the reality is that every senator and every representative has within his or her legislative area corporations who are affected to varying degrees - and they will lobby,' Prof Bruner said.


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