Smith Encourages Parity for U.S. Business in Foreign Markets
Legislation Will End Overtaxation for Certain Joint Ventures
WASHINGTON–Senator Gordon Smith (R-OR) today introduced legislation that would simplify a complex provision of the tax code that is an impediment to U.S. businesses in foreign markets.
"U.S. international tax rules should not penalize companies with overly complicated and costly limitations purely because they choose or are forced to do business in a certain form," said Smith. "This over taxation must be eliminated to level the international playing field for U.S. companies."
The Foreign Tax Credit (FTC) was designed to ensure that U.S. corporations were not subject to double taxation on foreign income. A number of limitations were placed on these credits in order to guard against attempts to reduce U.S. taxes on income earned here. Consequently, income earned abroad is sorted into separate "baskets" based on how the income is earned, also known as "look-through" treatment.
Income from certain corporate joint ventures has not always been afforded look-through treatment. In the past, income from a 10/50 company, where a U.S. firm has substantial ownership (at least 10 percent) but not a controlling interest (50 percent), was subject to different tax treatment. Legal and political realities in foreign markets often necessitate the use of corporate joint ventures with local firms. The 10/50 transition rules do not allow the full use of foreign tax credits, thus overtaxing income generated from these business ventures.
In 1997, Congress attempted to address disparity with legislation affording look-through treatment for dividends paid by 10/50 companies. However, the bill included vague transition rules that were complex and expensive for U.S. companies. Smith's legislation resolves these transition issues by restoring parity in the tax treatment of joint-venture income to other income earned by U.S. companies.
