The tax and trade implications of new legislation targeting Russia

President Joe Biden, on April 8, signed a bill suspending Russia’s preferential trade status, while the Senate Finance Committee introduced legislation that would deny foreign tax credits and certain deductions for U.S. companies earning income in Russia and Belarus, as well as sanctioned individuals.

This burst of legislative activity ended weeks of uncertainty as to whether Congress would take additional actions to punish Russia economically for its invasion of Ukraine. Just before Congress departed Washington for its two-week Easter recess, it reaffirmed its strong bipartisan resolve to do so.

The Suspending Normal Trades Relations with Russia and Belarus Act

The Suspending Normal Trade Relations with Russia Act (H.R. 7108) revokes Russia’s and Belarus’ current trade relationships with the United States. President Biden signed the bill after the Senate approved it with a 100-0 vote. The measure also passed the House by a large margin.

The new law authorizes the president to proclaim increases in the duty rates applicable to products of Russia or Belarus. The law terminates that authority on Jan. 1, 2024, but allows the president to restore normal trade relations with Russia and Belarus before that date, subject to congressional disapproval.

The president also signed a corollary bill that bans Russian oil imports, the Ending Importation of Russian Oil Act (H.R. 6968), which was unanimously approved by the Senate. The House previously passed versions of these two bills, but they had stalled in the Senate.

RSM insights

This legislation could have a significant economic impact since the White House will now be able to increase tariffs on Russian goods coming into the United States. That may result in significant disruptions to businesses that rely on Russian goods, such as oil, fertilizer, grain, and minerals, among other things.

On April 7, the same day that Congress approved the above bills, Senate Finance Committee Chairman Ron Wyden, D-Ore., and Senate Finance Committee Member Rob Portman, R-Ohio, released a discussion draft and draft legislative text that would eliminate tax preferences under the Internal Revenue Code for U.S. multinational companies with operations in Russia or Belarus, and would suspend the availability of tax benefits under U.S. income tax treaties for residents of those countries. Individuals subject to sanctions would also be included in the proposed measure.

General highlights of the proposal include:

Deny foreign tax credits for income taxes paid to Russia or Belarus

Thirty days after becoming law, Internal Revenue Code section 901(j), which generally imposes restrictions on the use of a foreign tax credit in the case of income and taxes attributable to certain countries, would apply to Russia and Belarus; and any income taxes paid or accrued to Russia or Belarus, and attributable to the period after section 901(j) applies, would be ineligible to be claimed as a foreign tax credit or would be ineligible for a deduction.

Subject income to the full corporate tax rate in subpart F

Under Internal Revenue Code section 952(a)(5), income derived by a controlled foreign corporation (CFC) from countries subject to section 901(j) is automatically treated as subpart F income subject to U.S. taxation, and it would be subject to the full 21% corporate rate. In addition, losses from such countries cannot be used to offset other income earned as global intangible low-taxed income (GILTI).

Exit safe harbor

Companies that have already exited or are rapidly shutting down operations in Russia and Belarus may be eligible for safe harbor relief, such as treating losses from these countries as GILTI losses. The discussion draft specifies that the safe harbor is intended to allow companies that have “substantially shut down operations” in Russia and Belarus to utilize losses that have occurred or continue to occur. To be eligible, gross receipts earned after the date of enactment in Russia or Belarus must generally be substantially less than gross receipts earned before the date of enactment for the taxable year (no more than 15% for calendar year taxpayers, with other rules for certain fiscal year filers). 

Loss of U.S. tax benefits

In general, 30 days (or 60 or 180 days, in the case of new or preexisting portfolio interest obligations, respectively) after the later of (i) the enactment of this legislation or (ii) a person is included in one of the three categories of identified persons specified below, such a person will lose access to certain tax benefits in tax treaties and under the Internal Revenue Code.

Such tax benefits include:

  • Any tax treaty benefits
  • Exemption from withholding for foreign governments
  • Exemption from withholding for portfolio interest
  • The trading safe harbor
  • Exemption from tax for shipping income
  • Exemptions from Foreign Investment in Real Property Tax Act withholding

The loss of these benefits would apply to three categories of identified persons:

  • Any person sanctioned by the United States in relation to the invasion of Ukraine
  • The governments of Belarus and Russia
  • Any person identified by the secretary of the U.S. Department of the Treasury as participating in the invasion of Ukraine, an entity organized in Russia or Belarus, or an executive or officer of such an entity

The secretary of the U.S. Department of the Treasury would be given the authority to identify any person that controls or is controlled by, related to, or is an affiliate of, any person identified under the above categories.

The secretary of the U.S. Department of the Treasury would be given the authority to identify any person that controls or is controlled by, or related to, or is an affiliate of, any person identified under the above categories.

Suspension of tax information exchange

The exchange of tax information with Russia and Belarus under tax treaties or intergovernmental agreements would be suspended as long as section 901(j) applies.

RSM insight

These provisions would raise the effective tax rate on income from operations in Russia and Belarus and essentially result in double taxation. In addition, dividends and interest paid to Russian and Belarus residents will be subject to the full U.S. gross basis withholding tax of 30%, so the U.S. withholding agents should adjust their withholding accordingly. In some cases, U.S. withholding agents may bear the burden of this increased withholding where the underlying agreement requires a U.S. withholding agent to gross-up for any tax due at the source. U.S. borrowers with loans from Russian or Belarus lenders should carefully consider the impact of these proposals.

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This article was written by Dave Kautter, Ramon Camacho, Fred Gordon and originally appeared on Apr 15, 2022.
2022 RSM US LLP. All rights reserved.
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