US tax bill set to hit multinationals

By Eoin Callan in Washington

Multinational companies with US subsidiaries could face huge new tax bills under a law passing through the US Congress, diplomats and business groups have warned.

The new measure, known as the Doggett law after the Texas Democrat who proposed it, aims to prevent international companies avoiding US tax when they transfer funds from the US to parent groups via countries with favourable tax treaties, such as the UK and the Netherlands.

At present, companies with headquarters in countries that have no US tax treaty, such as Taiwan and Singapore, can avoid a 30 per cent tax on funds transferred from US subsidiaries by setting up a unit in countries with favourable treaties. Congressional Democrats say the legislation is focused on “tax haven hideaways”.

Todd Malan, head of the Organization for International Investment, said it would unfairly discriminate against foreign companies that create US jobs and would interfere with legitimate business activity.

Under the legislation, Samsung, the South Korean conglomerate, for example, would not be eligible to make tax-free transfers from its US division to its UK financing unit. It pays a zero rate of tax on such transfers under an Anglo-American treaty, according to people familiar with the group’s structure.

Samsung’s US subsidiary would instead pay the 15 per cent tax rate that applies to Korean companies on transfers from eh US. Samsung said the company would not comment on the issue.

The measure would potentially hit Japanese carmakers with big US operations. Nissan said that, besides making cars, it ran a consumer finance business and needed to be incorporated in a number of countries to access capital markets and maintain a tax-efficient structure.

Several international companies, including Panasonic, Unilever, Alcaltel-Lucent, Swiss Re and Allianz, are lobbying against the provision.

An executive at a global company with US factories said: “This is another signal that the US is not a friendly place to do business. We do not need this. We can go to Canada or Mexico.”

The provision, which has passed the House of Representatives, is to be debated in the Senate next month. It would cost foreign groups $7.5bn over 10 years, according to congressional estimates.

Copyright The Financial Times Limited 2007