Foreign firms press for tax law change

Mar 3, 2010 — The Boston Globe

By Robert Gavin

Mar. 3, 2010 (The Boston Globe delivered by Newstex) --

Foreign corporations, which include some of the largest employers in Massachusetts, are pressing to change a state law they say taxes their subsidiaries unfairly and will discourage them from investing and expanding here.

The law, adopted as part of a broader rewrite of corporate tax laws in 2008, makes Massachusetts one of the only states to tax royalties and interest paid by local subsidiaries to their corporate parents in other countries, according to the Organization for International Investment, a Washington lobbying group that represents the US subsidiaries. Taxing the payments raises about $40 million a year in additional revenue for the state, according to rough estimates by the state Department of Revenue.

Foreign-owned companies argue the law amounts to double taxation, since the corporate parents must pay taxes on royalties and interest in their home country. They also say it violates the spirit of tax treaties between the US government and more than 60 other nations that are aimed at preventing double taxation.

``This violates all international norms, and is such a disincentive to invest in Massachusetts,'' said Alex Spitzer, senior vice president for tax at the US subsidiary of Nestle SA, the Swiss food products conglomerate that employs more than 400 people in Massachusetts. ``We understand states are desperate for revenue, but this is just killing the golden goose.''

State lawmakers are considering legislation that would fix the problem for most foreign companies, but no action is imminent.

``It's something we've been looking at,'' said state Representative Charles Murphy, the chairman of the House Ways and Means Committee, which writes tax legislation. ``It's a legitimate issue in terms of tax equity, and it's an issue that needs to be addressed.''

Foreign-owned firms and their governments have been pressing to change the law for about a year. These companies employ about 170,000 people in Massachusetts, or about 6 percent of the state's total employment, according to the investment group.

Among the largest here are Royal Phillips Electronics NV, a Dutch company that has its North American headquarters in Andover and employs nearly 5,000 in the state; Novartis AG (NYSE:NVS) , the Swiss pharmaceutical firm that employs nearly 2,400 here; and Royal Ahold NV, the Dutch firm that owns Stop & Shop supermarkets, employing about 22,000 full- and part-time employees in Massachusetts.

The tax treatment of foreign-owned companies is another example of government overreaching and putting the state at a competitive disadvantage, said John Regan, executive vice president at Associated Industries of Massachusetts. Firms frequently complain that lawmakers and policy makers don't consider how business costs compare to other states.

Regan said he's frequently asked by lawmakers and Patrick administration officials about what would improve the climate for business and investment in Massachusetts. ``I always say fix unemployment insurance and fix these tax issues,'' Regan said. ``And they always respond, `Other than that.' ''

Cyndi Roy, spokeswoman for the state Executive Office of Administration and Finance, said the tax changes were enacted after a long, open process that balanced a wide variety of views and interests.

``Governor Patrick proposed this important reform and continues to support it, both as a matter of good tax policy and because substantial changes would forgo significant state tax revenue at a fiscally difficult time,'' she said. ``Nonetheless, we have met several times with businesses affected by these rules and are taking their concerns under consideration.''

Traditionally, Massachusetts and other states have allowed foreign subsidiaries to deduct the royalties and interest paid to parent companies from corporate income taxes. The problem began here when Massachusetts adopted a new system aimed at preventing domestic companies with operations in several states from avoiding taxes in Massachusetts by shifting income to states with lower taxes.

The law also included provisions to prevent foreign-owned corporations from shifting income out of the country to avoid taxes and eliminated long-accepted deductions used by many firms. Officials of foreign-owned companies say international tax treaties recognize those deductions as legitimate.

They support legislation that would allow the foreign subsidiaries to deduct royalty and interest payments if their home countries have tax treaties with the US government.

Robert Gavin can be reached at rgavin@globe.com.

Newstex ID: BGL-1035-42506449