H. Jacob Lager

It’s Not Just the U.S.: EU to Vote on Financial Transaction Tax

In Financial Transaction Tax, International taxation on January 28, 2013 at 11:15 am

EU and Financial Transaction Tax

According to a January 22 release from Sen. Tom Harkin (D-Iowa) and Rep. Peter A. DeFazio (D-Ore.), a looming vote by EU finance ministers to allow European governments to impose a financial transaction tax might bolster an effort to impose the same tax here in the States.

What the what?  An Obamacare tax, higher capital gains and dividend taxes, and California’s Prop 30 weren’t enough?

So what is a “financial transactions tax?”

A financial transaction tax is a tax imposed on a specific type of transaction for a particular purpose. When applied to the world of finance, it typically means a small tax on the purchase or sale of stocks, bonds, or other financial instruments.

Different U.S. financial transaction taxes have been proposed (but not yet passed) in Congress since 2009.

Until recently, a major deterrent against any additional tax on U.S. stock traders was the possibility that major traders would simply shift their activities overseas. Of course if the EU passes a parallel regime, Europe will not prove nearly as attractive an option for such multinational players.

This is why Harkin and DeFazio, longtime advocates of a U.S. financial transactions tax, publicly lauded the European move, which would allow for a tax of 10 basis points on stocks and one basis point on derivatives on financial transactions.

“Today’s actions mean there will be less opportunity to shift U.S. trading overseas to avoid a U.S. FTT.  Wall Street’s criticisms of an FTT are rapidly shrinking,” said DeFazio.

By contrast, Harkin’s and DeFazio’s proposed three basis points (three cents on every $100 financial transaction) tax seems downright cheap!

Before we start patting ourselves on the back, it would be wise to note that only 11 EU countries have joined in the efforts to create an EU financial transaction tax:  Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain.  Notably absent is the UK, Europe’s biggest financial hub, and a natural destination for any trading firm that might seek to escape U.S. taxation.

Also, the EU proposal is specifically meant to raise funds to shore up shaky banks.  The Harkin-DeFazio measure won’t necessarily be tied to the same “too big to fail” safety net.

Hmmmm… maybe those three basis points aren’t such a good deal after all….

Photo by European Parliament

Show me! Missouri, international taxation and the Constitution

In International taxation, Taxable sales on January 17, 2013 at 4:38 pm

Missouri, international taxation and the Constitution

In an era of cloud transactions and electronic wallets, it’s sometimes easy to forget that familiar brick-and-mortar concepts typically govern the rules of taxation.

Case in point: recently published Missouri Department of Revenue letter ruling 7933 (August 10, 2012), in which the state determined automotive parts sold to a foreign customer were subject to sales tax because the title and risk of loss in passed in Missouri.

This is an important concept to remember for anyone selling goods abroad:  Where the sale is deemed to have occurred, matters.  Had the sale occurred outside of Missouri, the state would have been constitutionally prohibited from imposing a sales tax due because the Interstate Commerce Clause, the Foreign Commerce Clause and the Import-Export Clause operate to prevent states from impinging on free and open commerce among the several states themselves and among the United States and foreign countries.

So where did the Missouri sellers err?   The parties elected to have the foreign purchaser’s shipping agent pick up the parts from the Missouri seller directly.  By doing so, title and risk of loss to the parts passed in Missouri at the point of pick-up.  Consequently, the transaction did not depend on the exportation of the goods out of Missouri and did not constitute “foreign commerce.” Thus, the sales were simply a taxable Missouri sale.   Most states incorporate this constitutional exception into their sales tax regulations.   In this case, Missouri Regulation 144.030.2(1) specifically exempts from sales tax “such retail sales as may be made in commerce between this state and any other state of the United States, or between this state and any foreign country, and any retail sale which the state of Missouri is prohibited from taxing pursuant to the Constitution or laws of the United States of America.”

But if you’d like to rely on a less-exalted rule when planning your client’s next international transaction, it’s always good to ask the question, “Where are the goods when we actually part with title?” If the answer is “the state in which you do business,” you likely have a taxable sale.

If you’re looking for a different result, might be time to bring in a lawyer.

Photo by Doug Wallick

Fiscal cliff fallout: Did you survive?

In Business entities, Fiscal cliff, Foreign taxes on January 9, 2013 at 4:39 pm

Fiscal cliff:  did you survive?

For roughly 24 hours we dangled – no, fell – off the dreaded “Fiscal Cliff.”  Then Congress saved us.  Well, saved us from uncertainty at any rate.

While Cliff coverage focused primarily on individual tax rates, two very important tax provisions for multinational firms were extended for another year.

First, the “active financing exception,” which allows domestic corporations to exclude foreign  interest income earned by their active foreign subsidiaries was, again, extended until 2014.  This rule was created in 1997 as a temporary measure to help U.S. banks and manufacturers compete internationally.  It has been annually renewed every year since.  We examined it here a few months ago.  So Morgan Stanley, Ford, and GE can rest easy for another twelve months.

Second, Congress also extended the “look-through” treatment of certain payments between related foreign subsidiaries (known as “controlled foreign corporations” or “CFCs”) for one more year.   With this rule, passive income (namely dividends, interest, rents, and royalties) received by one CFC from a related CFC will not be subject to the Subpart F rules.  The Subpart F regime would otherwise force the CFCs’ common U.S. parent to recognize a taxable dividend on such inter-company income.  The key to this exemption is that the character of the income in the hands of the payor CFC must not be Subpart F income itself.  In other words, once one foreign sub earns foreign income from an active trade or business, the multinational family is free to move it around with no U.S. tax consequences.

For another year, at least.

Photo by mith_y.

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