Thursday, May 27, 2021
Noam Noked (Chinese University of Hong Kong; Google Scholar), A Cut of the TikTok Sale: U.S. Taxation of Inbound Foreign Direct Investments, 40 Va. Tax Rev. ___ (2021):
Should foreign investors share their profits from selling a U.S. business with the U.S. Treasury? This question has been recently raised in the context of a potential sale of TikTok’s U.S. operations, when then-President Trump ordered that TikTok be banned in the United States unless an American company buys it in a deal where “the Treasury of the United States gets a lot of money.” However, the requirement to share profits with the U.S. Treasury has no legal basis because the United States, unlike many other countries, does not generally tax foreign investors’ capital gains. This Article evaluates this tax treatment and explores potential reforms.
This Article calls to impose capital gains tax on foreign investors selling direct investments in U.S. corporations. There is no convincing reason for this exemption which favors foreign investors over U.S. investors, creates inconsistency between the tax treatment of capital gains and dividends, and enables some foreign investors to pay no tax in any jurisdiction on their gains from selling U.S. companies. The historical problem that led Congress to exempt foreigners — difficulties in enforcing the capital gains tax against foreign investors — could be effectively addressed in the current tax environment through withholding tax obligations and beneficial ownership reporting requirements. Due to the sharp increase in inbound foreign direct investment over the past decades, the quantum of forgone revenues from this exemption is substantial.
However, imposing tax on foreigners’ capital gains from selling direct investments in U.S. corporations would only capture part of the profits from selling highly-digitalized businesses because these transactions could include the sale of valuable foreign-owned intangible assets used to enable or support the operation of U.S. businesses. Taxing the profits from the sale of such intangibles would require more substantial reforms, as currently advocated by the OECD in its Pillar One proposal, such that market jurisdictions receive larger portions of the residual profits of companies in the digital economy space. As policymakers are now considering reforming the taxation of capital gains, corporate profits and the digital economy, this matter is worth serious discussion and consideration.