USA draft law on WHT

 House Republicans introduced a draft law on Thursday that would increase US withholding tax (WHT) on individuals / companies that come from a UTPR country (based on citizenship / incorporation rather than residence reporting here: WHT would increase by 5% at first, but going up to 50% if UTPR is not removed. They call this a ‘reciprocal tax’ or ‘retaliatory tax’. The chances of this making into law during this session of Congress are very slim given Democrat control of Senate and the possibility of a presidential veto.

As this tax takes aim at UTPR implementing countries, most likely targets are all US allies (all of the EU countries, UK, Japan, Korea, Australia and a handful of others), whereas others (eg China) are off the hook. The new tax is widely seen as aggressive, but its scope is narrow: it only applies on on payments already subject to WHT / US real estate related income, meaning lots of operational trade flows as well as foreign income flows are out of scope. There doesn't appear to be a clause that stops taxpayers from claiming double tax treaty (DTT) benefits either, which would make the increase moot in many cases. Similarly, there doesn't appear to be an UBO test, so holding structures through non-UTPR countries could be fine. Also apparently fine are companies incorporated in a non-UTPR country (eg a tax haven), even if they're tax resident in a UTPR country.

There's questions how this would practically work. Right now, if a US company pays interest, it withholds 30% unless recipients can prove they're eligible for reduction. If there's an increased WHT rate of 35%-50%, does the 35%-50% become the new baseline (with parties needing to prove they're not UTPR country incorporated to drop to 30%)?

The WHT increase applies on even small scale corps / individuals (whereas UTPR is subject to revenue thresholds). The increase is also aggressive as compared to UTPR revenue at stake on US income. Republicans have focused a lot on cases where UTPR could apply on US income, but those are mostly corner cases. The UTPR revenue on non-US income of US MNEs is likely more substantial. Is defending low tax outcomes on non-US income of US MNEs really worth a trade fight with US's biggest allies?

The tax increase is unlikely to see the light of day, but it is of course possible that it may resurface in 2025, though likely in significantly reworked form. Two years is a long time in international tax these days, so not too many people would be concerned about the 2025 plans for now. But it seems that even when you set out to create a retaliatory, extraterritorial and discriminatory measure, it is quite difficult to make it sufficiently well targeted to ensure you are discriminating who you want to discriminate.

Obvious disclaimers: this is not advice. These views are my own and do not necessarily represent my employer.