Academic journal article Journal of Accountancy

Clinton's Tax Plan: Royalty and R&E Provisions for Multinationals

Academic journal article Journal of Accountancy

Clinton's Tax Plan: Royalty and R&E Provisions for Multinationals

Article excerpt

As expected, the comprehensive economic plan President Clinton submitted to Congress contains a number of provisions affecting multinational corporations.

One revenue provision that received little attention in the newspapers may have a significant effect on the foreign tax credit limitation of certain companies. It (1) requires the allocation of research and experimentation (R&E) expenses to the place of performance and (2) treats all royalties as passive income for foreign tax credit limitation purposes.

A corporation may offset U.S. taxes with credits for taxes paid to foreign countries, but the foreign tax credits are limited to U.S. tax on foreign source income. In calculating foreign source income, certain expenses (including R&E) must be allocated between U. S. and foreign sources.

Currently, U.S.-based R&E is partially allocated to foreign sources, decreasing the limitation. Under Clinton's proposal U.S.-based R&E expenses would not be allocated to foreign source income - and therefore would increase the foreign tax credit limitation as compared with current law. On the other hand, R&E performed in other countries would be fully allocated foreign source income - decreasing the limitation. Presumably, this would have the effect of encouraging countries to perform R&E activities in the United States.

The foreign tax credit limitation is calculated separately for various income categories or "baskets." These are generally intended to separate income normally subject to high foreign tax rates (for example, operating income) from income normally subject to low tax rates (for example, passive income). …

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