January 2, 2013 10:25 pm

US banks retain key tax break in cliff deal

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US banks and other large cross-border companies will retain a key tax break covering billions of dollars in foreign income under this week’s fiscal cliff deal.

Extending the so-called “subpart F exception for active financing income” will allow multinationals to defer paying US taxes on certain financial transactions undertaken outside the US. The companies are taxed by the US on that income only when it is brought back to the country.

Proponents say the exemption evens out the playing field for those companies operating outside of the US – allowing them to compete with foreign rivals that may be charged a lower tax rate by their home governments. But critics say the exemption is one of many offshore tax loopholes that collectively cost the US $150bn a year, according to some estimates.

The exemption was enacted as a temporary measure in 1998, as part of former US President Bill Clinton’s 1997 Taxpayer Relief Act, but it has been extended by Congress every few years since.

Companies including Bank of America, Bank of New York Mellon, Citigroup, General Electric and JPMorgan Chase have banded together to form the Active Financing Working Group, to lobby for renewing the exemption in recent years.

The group has paid $1.03m to lobbying firm Elmendorf Ryan since 2009 to campaign for the tax break to be extended, according to the Center for Responsive Politics.

Extending the exemption will cost the US Treasury some $9.4bn in lost revenue in 2013, according to estimates from the Senate Joint Tax Committee.

Subpart F of the US tax code requires companies to pay US tax on “passive” income earned from interest, dividends and other financial earnings overseas. The exception allows those companies to treat the income as “active” – meaning that US taxes are not imposed on the earnings until they are repatriated to the US.

“The active financing rules, which have broad bipartisan support, are necessary to maintain the competitiveness of the US-based financial services industry and of manufacturing companies that rely on financial services arms to provide financing for large-ticket manufactured products,” the Active Financing Working Group said last year. Letting companies pay local taxes instead of the US rate can allow them to lend money or underwrite debt at more competitive rates, the group says.

The Securities Industry and Financial Markets Association, an industry group which counts hundreds of banks and brokerages among its members, has also commented in favour of extending the tax break as part of the working group.

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