Major international banks operating in the US could be disproportionately hit by new tax rules that will penalise the way they have structured their global operations, lobbyists and lawyers have claimed.
Lenders warn that Senate “base erosion” tax plans being discussed by lawmakers will penalise foreign-owned banks that make interest payments within their corporate groups. They complain that the regime will ultimately impose a tax penalty on lenders in part because they are complying with regulatory obligations in the US.
In a letter seen by the FT, the Institute of International Bankers, which represents the US units of foreign banks, issued lawmakers an “urgent” request to amend the provision, warning that in its current form it would force banks to reduce lending or restructure their US operations.
The IIB’s members include BNP Paribas, Credit Suisse, Deutsche Bank and UBS and it says its members provide about one-third of all US business loans and hold approximately 20 per cent of all US banking assets.
The problems underscore the complexity of the international tax regime that is being rushed through Congress as lawmakers attempt to finalise the biggest overhaul of the US tax code for 30 years before the end of the year. Critics say the effort has been conducted with excessive speed and secrecy and will throw out multiple unintended consequences that drafters failed to envisage.
The problem for banks has arisen because of efforts by US lawmakers to reduce international companies’ ability to drive down their tax bills by funnelling tax-deductible payments out of the US to other entities within their corporate group.
Elena Romanova, a New York-based partner at Latham & Watkins, said banks were in a unique position because of the way their sector works. “A lot of foreign banks are set up in such a way that they fund a lot of their operations in the United States by their subsidiaries through inter-company loans,” she said.
Lenders are in a different position from other companies, for example industrial groups that can get funding from other means, she said. In addition, “one could say they could be adversely affected because of the structure that is being imposed on them by the regulator”.
Sarah Miller, IIB’s chief executive, said in the letter to Kevin Brady, the chairman of the House Ways and Means Committee, that the bill had clear “flaws”, arguing that anti-abuse provisions wrongly included payments between foreign banks and their US affiliates.
“It will impose double taxation on payments by US affiliates of international banks,” she wrote. “It will force international banks to pay a US tax penalty for complying with their US regulatory obligations.”
The key concern centres on the Senate “base erosion and anti-abuse” (BEAT) element of the proposed international tax rules, rather than the drafting in the House version of the legislation.
Mr Brady is now presiding over the conference between the House and Senate that is aimed to merge the two chambers’ tax bills. A spokesperson for the House Ways and Means Committee said: “Yes, outbound related party interest payments are covered under the BEAT. Members have received feedback on various provisions in both bills and are considering those comments as they work through the conference process.”
Ms Miller of the IIB wrote: “If these flaws are not fixed, the tax liability for international banks will be significantly higher than their current liability (which runs counter to the stated purpose of tax reform). That will inevitably result in business decisions to limit or restructure the US operations of international banks, given that the financial services business is highly competitive and margins are narrow.”
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