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International tax lawyers are scrutinizing a state and local funding bill signed by President Barack Obama on Aug. 10 that significantly curbs how U.S. multinational corporations can use foreign tax credits. The administration bills the changes as closing international tax loopholes for multinational companies. In practice, they’ll significantly change big companies’ tax decisions and have a far-reaching impact on foreign corporate transactions. The provisions’ effective dates range from immediately to the tax filer’s first taxable year that starts after Dec. 31, 2011. John Harrington, a tax partner in the Washington office of Sonnenschein Nath & Rosenthal, spoke with The National Law Journal about the key changes and how they affect multinational companies, overseas deal-making and lawyers. The Q&A has been edited for clarity and length. NLJ: What are the major tax changes? JH: There [are] two that are the most significant. The first is intended to prevent a [U.S. taxpayer] from splitting the foreign tax credit from the foreign income. The old rule did allow corporations to separate the tax reporting of foreign income from the credits. Now you don’t get credit until you report the income for U.S. tax purposes. It’s conceptually pretty straightforward but there are a lot of technical issues that do come up. The second is known as covered asset acquisitions. It’s really dealing with a situation where under U.S. law when [a U.S. company buys] a foreign company, [it gets] credit for buying the assets. Either by design or by making an election, you are able to treat it as buying the assets for U.S. purposes but buying the stock for foreign tax purposes. As a result, you’re getting bigger depreciation and other deductions for U.S. purposes. Therefore, U.S. taxable income is going too be smaller than foreign taxable income. The change is going to reduce the U.S. credit on the foreign taxes. NLJ: What are the implications of the new law for multinational companies? JH: There’s a short-term impact and a long-term impact. The long-term impact is significant changes to the U.S. tax rules going forward, when you’re thinking about engaging in certain types of transactions and setting up [certain types of corporate] structures. If you’re planning on going overseas, or operating overseas, there are new tax rules to be aware of if you’re going to make acquisitions and set up subsidiaries. The short-term impact in some of these cases is that companies have set up [corporate] structures [or entities] based on the way the rules used to be. Some of the structures may no longer make sense. In those circumstances [the companies] will have to look at liquidating corporations and moving things around. They may [realize they] got a tax benefit under the old rules, but it’s not economical under the new rules. NLJ: Will it have much effect on multinational companies that aren’t making acquisitions or divesting divisions? JH: If you never did an acquisition, and you’ve just got one subsidiary, at first blush I don’t think these provisions would have any significant impact on you. But that doesn’t describe most [multinational] entities. If you’re going overseas, it’s usually because you’re in a growing mode and you’ve grown domestically. The profile of companies like this is more likely to be more dynamic. NLJ: How would these changes affect enormous multinational companies that opened global offices and plants in the past? JH: If you’re in a very mature industry, this would potentially have less impact. But I don’t think that’s really an accurate description because [these companies are always] discovering some of their markets are mature and they need to go somewhere else. Even the biggest companies have to go into new markets. They wind up making decisions to go out of certain countries. They’re going to be liquidating companies, downsizing in certain areas, making acquisitions elsewhere and sometimes doing internal restructuring. Sometimes a country may change its laws; therefore you might want to switch operations somewhere else. Even if [a major multinational] company seems very stationary on the surface, from a big-picture standpoint [it's] making lots of changes. NLJ: How are these changes likely to affect corporate deal-making? JH: I have a hard time imagining that companies are not going to do a deal overseas because the U.S. tax consequences went up. It might be true on the marginal deal. On the marginal case, it could impact [decisions], but typically someone is going to say ‘I can’t do this the way I used to.’ ” In some cases it will affect tax planning; in other cases will they do deals differently? They might buy the assets instead of stock and they may have to pay someone more because they’re buying the assets. It has spillover business effects as well. NLJ: What are the implications for attorneys? JH: The extent that lawyers are advising companies on things like tax planning and normal business arrangements [and corporate structures], as a lawyer you need to be aware that these rules have changed. There wasn’t a lot of debate [on these provisions in Congress]. They weren’t pending for that long. If you’re a corporate [lawyer], you have to be aware that some of the structures companies used to use might not make sense anymore. [The first step is] just revisiting all the things that made sense in the past.

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