July 18, 2018 / 6:11 PM / a month ago

Senate Democrats warn of 'gigantic loopholes' in Trump tax cuts

WASHINGTON (Reuters) - U.S. Senate Democrats on Wednesday lashed out at Republican President Donald Trump’s tax overhaul of December 2017, warning that it contains “gigantic loopholes” that could encourage companies to move plants and jobs abroad.

The U.S. Capitol building is seen before the start of President Barack Obama's primetime address to a joint session of the U.S. Senate and House of Representatives on Capitol Hill in Washington February 24, 2009. REUTERS/Jim Young

A report by Democrats on the Senate Finance Committee said new international provisions meant to encourage companies to keep jobs, plants and intellectual property at home could have the opposite effect. The panel oversees tax policy and other economic issues.

Analysts expect multinational corporations to make similar arguments in coming months to urge Congress to correct the unintended consequences of the same provisions, which govern international transactions.

The Democrats’ report comes at a time when the Tax Cuts and Jobs Act, which Trump signed into law in December, has become a political football in the Nov. 6 congressional campaign.

Trump and his Republican allies in Congress slashed the U.S. corporate income tax rate to 21 percent from 35 percent. The overhaul also freed much foreign income from U.S. taxation, while imposing penalties on companies that shift earnings abroad or keep their intellectual property overseas to lower their U.S. tax bills.

One problematic provision is a tax on Global Intangible Low Taxed Income, or GILTI, which is intended to discourage companies from locating profits in tax havens by imposing a tax rate of around 10 percent on “excess” returns.

Senate Democrats said the provision encourages a form of gaming called “cross-crediting,” in which a company can use foreign tax credits earned on income from high-tax countries to eliminate its GILTI tax bill on income from tax havens.

Companies can also reduce GILTI liabilities by moving plants and equipment overseas, the report said.

Senate Democrats warned that the law’s special low tax rate of 13.125 percent on foreign derived intangible income, or FDII, could discourage investment in U.S. plants and equipment, which reduces the incentive.

The GILTI provision has already caused consternation among corporations by inadvertently creating higher tax bills for those with only limited overseas exposure. Corporate lobbyists, who want Congress to rewrite the provision, are expected to make the same points to lawmakers in hopes of winning bipartisan support for legislation to repair the problem.

“You have an incentive under the GILTI regime ... to locate tangible investment outside the United States. You have a disincentive under the FDII regime to locate tangible investment in the United States,” Patrick Brown, a General Electric Co tax executive and former Treasury official, told a recent Washington tax forum hosted by Emerson Electric Co.

“So you say – sound-bite level – this is crazy. This doesn’t make any sense,” he added.

Reporting by David Morgan; Editing by Kevin Drawbaugh and Jonathan Oatis

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