Sen. Bernie Moreno, R-Ohio, introduced legislation on Sept. 5 that would impose an excise tax and deny deductions for certain offshoring payments. If enacted, the Halting International Relocation of Employment (HIRE) Act would have a significant impact on taxpayers that outsource services that benefit consumers, including call centers and shared service centers.
The bill would create a 25% excise tax under new Section 5000E on any “premium, fee, royalty, service charge, or other payment” to a foreign person for labor or services if the benefit is directly or indirectly “directed to consumers located in the United States.” The bill would also deny a deduction for any outsourcing payments and increase the penalty for any failure to pay taxes related to those payments.
A “foreign person” is defined broadly to include all non-U.S. persons, with an exception for corporations or partnerships organized under the laws of a U.S. possession. The bill provides no further definition of labor or services “the benefit of which is directly or indirectly directed to U.S. consumers.” This standard is potentially broad and could affect a wide range of payments and activities. The lack of key definitions could make the proposal difficult to administer, and guidance would be needed.
The bill would grant Treasury the authority to require information reporting and issue guidance to prevent avoidance, including through the use of transfer pricing, related parties, CFCs, and other intermediaries. The revenue from the tax would be dedicated to a domestic workforce fund.
Sen. Moreno is new to the Senate and is not a member of the tax writing committee. He attempted to bring the bill up on the Senate floor by unanimous consent on Sept. 17, but was blocked by Democrats. It is unclear whether the bill has the potential to gain any momentum in the near term. No cosponsors from either party have been announced, and Senate leadership has not indicated any plans to advance it. The introduction of a bill is not necessarily any indication of imminent action. Introduction is typically the least important step in the legislative process, and hundreds of tax bills are introduced every year that never gain any traction. In addition, tax legislation could be difficult this year (see Potential Government Shutdown Dims Prospects for Year-End Tax Deal).
BDO Insights
Although the bill may be unlikely to move this year, taxpayers should continue to monitor potential future action. The provision would raise revenue and could prove attractive to lawmakers at some point. It also has the potential to evolve as Sen. Moreno receives feedback and possibly refines the proposal.
Please visit BDO’s International Tax Services page or Corporate Tax Services page for more information on how BDO can help.