United States Tax: International revenue raiser in Reconciliation Bill

15 March 2010 -- The House Budget Committee on 15 March 2010 marked up and voted 21-16 to advance the "Reconciliation Act of 2010." While the action
was strictly a procedural maneuver necessary to get a health care bill to the House Rules Committee, it did reintroduce a number of largely "outdated" health care reform proposals, including a controversial revenue raising provision that would amend §894 of the Internal Revenue Code.

Previously included in H.R. 3970, "Tax Reduction and Reform Act of 2007," the provision would deny reduced rates of U.S. withholding tax under an otherwise applicable U.S. income tax treaty with respect to interest and royalties paid between two members of a foreign controlled group of companies in instances where any U.S. withholding tax would not be reduced under a treaty of the United States if such payments were made directly to the foreign parent corporation of such group. This provision would be effective for payments made after the date of enactment.

This version of the bill was released as part of a procedural move to provide the House Rules Committee with a legislative vehicle to amend when they meet to consider reconciliation language later this week. At that time, the Rules Committee is expected to strip all of the substantive content from the current bill - including the amendment to §894 - and substitute the proposed reconciliation text, but taxpayers and their advisors will nonetheless want to keep a close eye on the final version of the bill that passes out of the Rules Committee this week.


Outlook

Nothing in the current discussions suggests that a treaty override is on the table in the context of health care reform legislation. Additionally, the inclusion of the proposal in a bill that includes health care legislation would seriously tempt the Senate to amend the reconciliation bill, which for political and policy reasons the House is hoping will pass unamended.

However, the House has demonstrated a continued interest in modifying this provision and, in a pay-as-you-go environment, is likely to continue to turn to this and other controversial international tax revenue raisers to pay for legislative priorities. For example, House Ways and Means acting Chairman Sander Levin (D-Mich.) circulated draft small business jobs legislation on 15 March 2010 that is partially offset by a limitation of treaty benefits under §894. Given that an amendment to §894 would impact and override all U.S. income tax treaties, our expectation remains that the Senate would continue their historical resistance and block such a proposal.