Tax Convention with Chile

Floor Speech

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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.

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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 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.

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