Senate Finance Committee Chair Ron Wyden, D-Oregon, and committee member Rob Portman, R-Ohio, introduced bipartisan legislation Thursday to disallow foreign tax credits for companies that pay taxes to the Russian or Belarussian governments, and other tax benefits.
The bill would deny foreign tax credits and deductions for income taxes paid to Russia or Belarus. Russia and Belarus would join an existing list of countries already ineligible for foreign tax credits, including North Korea, Iran, Syria and Sudan.
Income would be subject to the full corporate tax rate under Subpart F of the Tax Code. Any income earned in either Russia or Belarus would be subject to the full 21% corporate rate, and any losses from those countries could not be used to offset other income earned as global intangible low-taxed income (GILTI).
There would be a safe harbor for companies that have already exited or are rapidly shutting down operations in Russia and Belarus. They could be eligible to have Section 952(a)(5) of the Tax Code turned off, so losses from those countries could be treated as GILTI losses, rather than falling under Subpart F, in which foreign taxes remain ineligible as a credit or deduction. The safe harbor would enable companies that have substantially shut down operations in Russia or Belarus to utilize losses that have occurred, or continue to occur.
To qualify for the safe harbor, gross revenues in Russia or Belarus would need to drop, compared to 2021, by at least 85% in 2022 and 95% in 2023 and later.
“American taxpayers should not subsidize the Russian war machine,” Wyden and Portman said in a statement Thursday. “Vladimir Putin continues to bomb civilians, and credible reports and strong evidence of war crimes, including execution of civilians and forced deportations, emerge daily. If companies choose to keep doing business in Russia and paying taxes to Putin’s government in the face of these atrocities, they should forfeit their foreign tax credits and deductions for taxes paid to Russia in the United States. Russian oligarchs and companies supporting Putin also shouldn’t be getting tax benefits in the United States.”
Under the bill, taxpayers would lose access to several tax benefits provided in tax treaties and the Tax Code, including:
- Any tax treaty benefits;
- The exemption from withholding for foreign governments (Section 892);
- The exemption from withholding for a foreign central bank (Section 895);
- The exemption from withholding for portfolio interest (Sections 871(h) and 881(c));
- The “trading safe harbor” (Section 864(b));
- Exemption from tax for shipping income (Section 883), and,
- Exemptions from Foreign Investment in Real Property Tax Act withholding (Section 897(l)).
The loss of tax benefits would apply to three categories of taxpayers: 1. Any person already sanctioned by the U.S. in relation to the invasion of Ukraine;
2. The governments of Russia and Belarus, and,
3. Any other person identified by the Treasury Secretary (in consultation with the Secretary of State) if repeal of the tax benefits would advance efforts to restore and maintain the peace, security, stability, sovereignty, and territorial integrity of Ukraine, and the person is either participating in the invasion of Ukraine with over $1 million in U.S. assets or income, or an entity organized in Russia or Belarus (excluding controlled foreign corporations) that sells goods or services to the Russian or Belarusian governments, or an executive, board member, or officer of such an entity.
In addition, the Treasury could identify anyone related to a person identified under one of the three categories above. If an entity is controlled by a person who has lost tax benefits under this section, the Treasury would be authorized under the bill to issue regulations applying the loss of tax benefits to them.
The Treasury would have to report to Congress on the process and justification for its selections.
Separately on Thursday, Sen. Rand Paul, R-Kentucky, held up passage of a $40 billion aid package to Ukraine, insisting on a provision to appoint an inspector general to oversee the funding. The Biden administration was hoping to speed the aid package to Ukraine by the end of this week, but it is not likely to pass in the Senate until next week. The aid package has already passed in the House with strong bipartisan support for helping Ukraine defend itself against Russia and Belarus.
