In Tax Plan's Fine Print, Banks Find a Problem
December 13 2017 - 4:59AM
Dow Jones News
By Telis Demos
As the U.S. Congress attempts to hammer out a final tax plan,
Wall Street is fighting to limit the scope of a provision meant to
discourage companies from sending money overseas to avoid
taxes.
Banks' beef: The way the provision is written in the Senate
version of the tax bill could make some key bank businesses much
more expensive. These include transactions in the $2 trillion
repurchase obligation, or "repo," market, as well as the business
of lending out stock that banks and other firms hold on behalf of
customers. Foreign banks, too, say the tax provision will make
their U.S. operations more expensive and reduce their ability to
lend in the U.S.
Repos are a big business and major funding mechanism for banks,
which make money by lending out securities they or their customers
own, such as U.S. Treasurys. They often involve transfers of cash
between different arms of a bank in different countries.
This and other business activities are at risk of being
specially taxed under the tax-code provision known as the base
erosion anti-abuse tax, banks and their industry groups say.
The provision is intended to limit companies' ability to shield
money from U.S. taxes that they send to their overseas arms. It
would ensure that companies pay a minimum level of tax on
transactions involving affiliated foreign entities.
All companies are potentially affected, but banks are especially
concerned because many of their businesses involve moving money
back and forth between their U.S. and foreign arms to secure
funding and facilitate transactions.
Currently, payments to overseas affiliates are deducted from
firms' U.S. tax obligations. Under the Senate version of the
tax-code overhaul, banks and securities dealers would as of Jan. 1
potentially owe a special, minimum 11% tax on those deducted
amounts.
The Senate bill exempts some types of derivative transactions
from the tax. But in exchange, banks would pay a higher overall
rate in terms of the base-erosion tax. Non-banks would only owe a
10% tax on these deductible payments.
For years, many countries have been seeking ways to stop
companies from so-called "stripping" earnings to reduce their
domestic-tax bills with foreign payments. The U.S. Senate will have
to decide how punitive it wants to be on such activities.
"There is an argument that this is an over-inclusive proposal,
because it's arguably applicable to nontax motivated transactions,"
said Rebecca Kysar, a professor at Brooklyn Law School who studies
international taxation and tax treaties.
In one example laid out by banking groups to senators, and based
on a 10% rate, a U.S. bank entering a "repo" transaction could end
up owing $10,000 in taxes on a trade that makes just a $1,000
profit, according to people familiar with the discussions. That is
because there is a $100,000 payment passing between the bank's U.S.
arm and U.K. arm on behalf of a client, for which the bank earns a
$1,000 spread. That $100,000 would still be deductible for U.S. tax
purposes, but it would also be subjected to the new, special
minimum tax. The result would be a $10,000 tax bill, the banks
argued.
Foreign banks fear the provisions could drive up the cost of
funding their U.S. operations. That is because a U.S. arm that
normally deducts the interest it pays on loans from its foreign
parent would now owe the special tax on that amount.
Concerns about the provision are another example of how big
companies, despite getting a major cut to their overall tax rates,
may still be squeezed by parts of the plan, such as the corporate
alternative minimum tax rate.
It isn't yet clear if banks will succeed in convincing lawmakers
to alter the language. Even lawmakers sympathetic to banks'
arguments may have trouble taking away revenue that is needed to
offset popular cuts elsewhere in the tax overhaul.
The revenues generated from taxing these payments could be
substantial. The Joint Committee on Taxation reported that the
foreign affiliate base-erosion provisions in the Senate bill would
generate some $140 billion in revenue over 10 years, versus $94.5
billion in the House version for the same period. The latter bill
doesn't impose a higher tax on banks and more broadly excludes
transactions.
Efforts to protect banks from these taxes have had mixed
results. The House version of the tax bill broadly excluded
transactions that involve the sale of a security from the
base-erosion provisions. Several bank lobbyists said the language
is vague, but preferable to the more limited language in the Senate
bill.
An early version of the Senate bill didn't offer any exemption
for banking activities. Groups including the Securities Industry
and Financial Markets Association sent letters detailing their
concerns about the tax applying to everyday movements of money to
foreign affiliates that aren't intended to hide income abroad in
lower-tax countries, according to people familiar with the
discussions.
The final version of the Senate bill added an exemption on
payments related to derivatives. But it didn't cover other banking
activities that involve intercompany payments.
The Institute of International Bankers, a group that represents
large foreign banks in the U.S., sent a letter to lawmakers asking
them to find ways to exempt intercompany interest payments. Some
European regulators have also proposed excluding payments made by
U.S. arms of foreign banks on debt related to regulatory capital
provided by their parent bank.
Write to Telis Demos at telis.demos@wsj.com
(END) Dow Jones Newswires
December 13, 2017 05:44 ET (10:44 GMT)
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