[Congressional Record Volume 169, Number 109 (Thursday, June 22, 2023)]
[Senate]
[Pages S2215-S2216]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
TAX CONVENTION WITH CHILE
Mr. CRAPO. Mr. President, I thank Ranking Member Risch for his
leadership in completing the resolution approving the ratification of
this tax convention with Chile. And specifically, I am grateful for the
opportunity to work together to include the following declaration in
this resolution: ``In light of substantial changes made to the
international provisions of Internal Revenue Code in 2017, the Senate
declares that future tax treaties need to reflect such changes
appropriately, including in Article 23. Therefore, based on discussions
with the U.S. Department of the Treasury, additional work is required
to evaluate the policy of Article 23 in addressing relief of double
taxation and to agree on whether further changes to the terms of the
Article are necessary for future income tax treaties.''
In light of the reservation amending article 23, I yield to the
ranking member of the Senate Foreign Relations Committee to elaborate
on the importance of this declaration.
Mr. RISCH. I thank the ranking member of the Senate Finance Committee
for his work on getting bipartisan agreement on this declaration. This
declaration is necessary, given the reservation amending article 23.
The reservation regarding article 23 amends language addressing the
scope of double tax relief in connection with income earned by a
Chilean subsidiary of a U.S. company. That reservation, which was
initiated by the current Treasury Department, calls into question
whether article 23 provides sufficient relief for double taxation;
specifically, in the case of a U.S. company owning at least 10 percent
of a Chilean company, whether the U.S. would provide a credit under the
treaty for income taxes paid or accrued to Chile by or on behalf of
that U.S. company with respect to earnings that were also subject to
U.S. tax under the global intangible low-taxed income, or GILTI,
provision enacted in the Tax Cuts and Jobs Act, or TCJA.
Although the Treasury Department did not agree to include a specific
clarification in the reservation with respect to that question, the
declaration in the resolution confirms that Treasury acknowledges that,
in light of TCJA's substantial changes to the international provisions
of our Tax Code, additional work is needed to evaluate the policy of
article 23 and whether it is sufficient in addressing relief from
double taxation. In other words, this declaration helps ensure that
outstanding questions regarding the scope of double tax relief provided
by article 23 are resolved before similar language is used in future
tax treaties.
Ranking Member Crapo, can you discuss why such a clarification is so
important with respect to future income tax treaties to which the U.S.
is a party?
Mr. CRAPO. Thank you, Ranking Member Risch. Without that
clarification, article 23 does not describe the primary mechanism that
mitigates double taxation for U.S. companies doing business abroad.
Before the Tax Cuts and Jobs Act, TCJA, U.S. companies' foreign
earnings were generally not subject to tax in the U.S. until the
foreign earnings were distributed as dividends to the U.S., a concept
generally referred to as ``deferral.''
For example, pre-TCJA, if a U.S. company operated in Chile through a
subsidiary, the earnings of the Chilean subsidiary were generally not
subject to U.S. tax until the subsidiary paid a
[[Page S2216]]
dividend to the U.S. parent company. In order to prevent double
taxation of the foreign earnings, under section 902 of the Tax Code,
the U.S. provided a foreign tax credit for tax paid on those earnings.
In this scenario, with respect to tax paid by the foreign subsidiary in
Chile, the U.S. company would receive a dollar-for-dollar credit
against its U.S. tax liability once the income was distributed, and
subject to tax, in the U.S. in order to prevent double taxation of the
dividend income.
TCJA made significant changes to these rules. For one, it ended the
concept of ``deferral.'' As a result of TCJA, U.S. companies are now
generally subject to current U.S. tax on their foreign earnings, even
if they are not immediately distributed to the U.S. parent, under the
global intangible low-taxed income, GILTI, which consequently
eliminated the need to impose U.S. tax on dividends when ultimately
distributed from the foreign subsidiary to the U.S. parent company.
As a result, in order to mitigate double taxation, TCJA modified and
expanded section 960 to provide indirect tax credits for taxes paid on
GILTI. TCJA also repealed section 902 foreign tax credits because,
generally, dividends received by U.S. companies from a foreign
subsidiary are no longer subject to U.S. tax. Instead, U.S. companies
receiving foreign-source dividends are generally allowed a deduction
under section 245A of the Tax Code for those dividends received.
Because U.S. companies' foreign earnings are now largely subject to tax
under GILTI, the primary mechanism for relieving double taxation under
current law is through an indirect tax credit under section 960.
Indeed, recent IRS data confirms that an overwhelming majority of
TCJA's new category of U.S. companies' foreign earnings subject to
current U.S. tax requires a foreign tax credit to mitigate double tax
relief.
As Ranking Member Risch referenced, because Treasury did not agree to
include in the reservation a reference to the primary method for
alleviating double taxation on a U.S. company's foreign earnings, it
calls into question whether article 23 provides sufficient double tax
relief post-TCJA. While I understand this lack of clarification should
not result in increased taxation on earnings of a U.S company's Chilean
subsidiary based on current law, U.S. taxpayers may not have adequate
protection from double taxation with respect to future treaties.
In short, this outstanding issue is fundamental to one of the core
motives for entering into income tax treaties, to mitigate double
taxation to reduce barriers to cross-border investment. Thus, I intend
to hold Treasury to its commitment to include language in future income
tax treaties to more comprehensively address the post-TCJA foreign tax
credit system. And if it fails to do so, I will not support approving
ratification of any future U.S. income tax treaty.
Mr. RISCH. I completely agree with the ranking member of the Finance
Committee. I will carefully review and consider future U.S. income tax
treaties to both ensure we resolve this important issue and to make
sure Treasury follows through on its commitment to further address
relief from double taxation in our tax treaties. I thank Ranking Member
Crapo for his leadership on this issue, and we will continue to work
together to hold Treasury to its commitment.
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