As the rest of the world was getting ready to welcome in the New Year, leaders in America were working on a deal which would see them avoid a fiscal cliff; and as part of the now agreed deal, they have extended a tax break which will benefit large cross-border companies.
The key tax break, which covers billions of dollars in foreign income, is known as the “subpart F exception for active finance income” which allows companies to treat the income as “active” – meaning that US taxes are not imposed on the earnings until they are brought back to the US.
The exemption was originally brought in in 1998 as part of the then US President, Bill Clinton’s 1997 Taxpayer Relief Act, as a temporary measure; however over the years it has continued to be extended – costing the US Treasury billions of dollars each year.
According to estimates from the Senate Joint Tax Committee, extending the tax break as part of the fiscal cliff deal will cost the US Treasury roughly $9.4 billion this year alone; whilst critics of the tax break believe that it is one of many loopholes which costs the US a collective $150 billion a year.
Despite the claims from the critics, many businesses are in favour of extending the exemption, arguing that the tax break provides a level playing field for those businesses operating outside of America, as it allows them to compete with their foreign rivals, who may be charged a lower rate of tax by their home governments.
As an accountant in Bristol, Elaine Durrant specialises in offering tax advice, guidance and support to businesses and individuals.