Business fears US tax proposals

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Planned US tax reforms, which would clamp down on firms moving funds between countries, would be highly damaging business groups have argued.

Pressure is growing in Washington on foreign companies with US subsidiaries which move funds to their parents via countries with favourable tax treaties.

They currently pay little or no tax but the House of Representatives has voted to tax the practice at up to 30%.

Business groups said the measure could deter firms from investing in the US.

Senate battle

Lobby groups said that about 60 multinational companies had expressed concern about the proposals, which are due to be considered by the Senate next month.

Many within the Democrat-controlled Congress regard the proposed measure to tax so-called "treaty shopping", which would raise an estimated $7bn (£3.5bn) a year, as a legitimate crackdown on corporate tax avoidance.

These companies are not doing anything illegal Rhian Chilcott, CBI

It would see firms having to pay tax of up to 30% on interest payments and other capital flows between US operating companies and their parent businesses.

This would be the case even if the funds were transferred via affiliates in the UK and the Netherlands, a practice which is currently tax-free on the basis of existing tax treaties between the US and other countries.

Experts said firms based in countries without tax treaties with the US, such as South Korea and Singapore, could be hardest hit.

The proposals, added as an amendment to a farm appropriations bill earlier this year by Texas congressman Lloyd Doggett, have yet to be approved by the Senate.

'Legitimate action'

Critics said the proposals flew in the face of existing treaty arrangements and were based on a misconceived attempt to equate tax avoidance with companies seeking to make their tax position as competitive as possible.

"These companies are not doing anything illegal," said Rhian Chilcott, the CBI's US director, adding that local subsidiaries were already paying tax and would effectively be taxed twice.

"They are taking advantage of a tax treaty which the US has negotiated."

She added that the proposals would "go a long way to undermine people's confidence in the US as a place to invest".