President signs international tax reforms into law

President Obama signed legislation into law on August 10 that includes a package of international tax reforms. The new law (P.L. 111-226) is estimated to raise over $10 billion in additional tax revenues over ten years.

The law provides funding to save the jobs of more then 100, 000 teachers throughout the nation. The law also helps states pay for shortfalls in their funding for Medicaid benefits. The international tax provisions provide the bulk of the funds needed to pay for the cost of the bill's benefits.

The law includes seven provisions that reform the U.S. income taxes imposed on U.S. multinational corporations (MNCs). The foreign tax credit is designed to prevent double taxation of foreign income earned by U.S. MNCs. Corporations generally have to pay income taxes to the country where they earn their foreign income. The U.S. Tax Code provides a credit to offset the U.S. income taxes owed on the same foreign income.

However, according to Congress and the Obama administration, MNCs are improperly applying the foreign taxes they pay to offset U.S. taxes due on other income. Five of the seven provisions address the foreign tax credit and would raise an estimated $9 billion over 10 years.

The Internal Revenue Code also imposes taxes on income earned in the U.S. and paid to foreign taxpayers living outside the U.S. The income is usually paid in the form of dividends or interest. The IRS collects taxes on this income by requiring the U.S. payer of the income to withhold taxes (up to 30 percent) on the payments before they are made to the foreign recipients. Two of the international tax provisions would impose this withholding tax on income paid to foreigners that current is escaping the tax. These two provisions are estimated to raise $400 million in U.S. taxes over 10 years.