After making drastic changes to cross border tax regime to pay school teachers last month, it seems international tax provisions are at the rescue again. The House last week voted 268-160 to advance legislation providing $7.4 billion to people seriously impacted at Ground Zero during the 9/11 clean up. The cost will be paid for by preventing “treaty shopping.”
Treaty shopping can be used to avoid paying U.S. taxes when a taxpayer claims to be a tax resident of a treaty favored jurisdiction. It occurs when for instance, multinational companies located in a country without a U.S. tax treaty receive U.S. income through a subsidiary in another country that has a treaty with the U.S. to avoid paying U.S. taxes. Number of recently concluded U.S. tax treaties contain anti treaty shopping provisions.
The bill subjects a withholding tax on subsidiaries serving as a conduit to firms without a treaty. The provision raises approximately $7.4 billion over ten years and is aimed at treaty shopping used by multinational companies incorporated in tax haven countries.