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The Executive Branch Must Act Within Its Authority


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Published in The Galveston County Daily News
April 13, 2022


While working behind the scenes in 2021, the Treasury Department (IRS) issued new rules for taxing American-based multinational companies on their overseas business. These changes involve rules governing the Foreign Tax Credit (FTC) rules. The Alliance for Competitive Taxation says the new rules “introduce enormous uncertainty in one of the most significant areas of tax law for globally engaged U.S. companies and one which, until now, has been among the most stable.” In the past, companies were allowed to deduct taxes paid to foreign nations when filing their United States tax returns. That practiced is now greatly blurred.

Initially, the rule change was for tax credits on Digital Service Taxes (DSTs) owed to foreign nations -- such as a tax on gains from digital business, like Internet advertising.   Previously the rules for governing Foreign Tax Credits didn’t apply to DSTs.   Businesses understood this issue and were expecting new IRS rules to start making DSTs taxable.  However, when issued, the new rules reached much further that originally envisioned, creating a double taxation issue with countries who don’t have tax treaties with the United States. The regions most affected involve business taxes paid to counties in Africa and South America.  Some of the firms most significantly impacted include, among others, the Coca-Cola Company, Exxon Mobile and Alphabet Inc. (Google). The impact will mean billions of additional U.S. taxes paid that were previously exempted because of the double taxation issue.

Secondly the Treasury rule change muddy the waters with “fuzzy” and obtuse definitions of terms. Tax experts aren’t even sure what some mean. When governments write obscure procedures it’s often about gaining an advantage with the possibility of getting the affected firms to take conservative approaches in order to avoid running afoul of the law/regulations.

The double taxation comes when companies pay foreign government taxes without credits being applied to their U.S. tax liability.  Companies from countries like France and Canada who have tax treaties with Brazil, for example, will have a competitive advantage over U.S. firms because they don’t have double taxation. In order to compete in foreign markets U.S. firms may need to pass on these higher costs to U.S. consumers.

But a larger issue also exists.  The executive branch (the Treasury Department) doesn’t have the authority to rewrite the tax regulations without such being granted by Congress.  Members of Congress are challenging these overreaching new rules, and rightfully so.

Tax increases don’t stop there.  The White House has proposed in its budget for 2023 what might be the largest tax increase ever. Included in its request is what they call a “billionaire tax” that isn’t for just billionaires. This provision demands a percentage tax on calculated wealth regardless of whether it was actually realized.

Solutions:

  1. Never allow an executive branch agency to rewrite the tax code out of whole cloth. Require that they work within the authority granted by Congress.

  2. The executive branch should negotiate treaties like France and Canada have done to eliminate the double taxation issue.


About the Authors and Columnists
Bill Sargent and Mark Mansius

2022

Bill Sargent and Mark Mansius have written
over 250 guest columns since 2014 and continue to do so.
Bill lives in Galveston, Texas and Mark in St. Georges, Utah
.