Disclosing the Tax Loopholes in the Iran Deal

by Andy Grewal — Thursday, Sept. 24, 2015

This week, Congressman Paul Ryan sent a letter to President Obama expressing concern that the nuclear deal with Iran would include special tax breaks for that country. The letter asks for a commitment to not extend such tax breaks during the remainder of the President’s term.

Generally, under Section 901 of the tax code, U.S. taxpayers who invest in a foreign country and pay taxes to a foreign government can credit those tax payments against their U.S. tax liabilities. This foreign tax credit facilitates cross-border investment and alleviates the problems associated with double taxation.

Congress, however, has decided to punish some countries, like Iran, by denying foreign tax credits to U.S. taxpayers who invest in those countries. Under Sections 901(j)(1) & (2), no credit is available for an investment in a country that supports international terrorism or whose government is not recognized by the United States. The statute also describes a few other characteristics that can lead to the denial of the foreign tax credit.

The President, however, enjoys statutory authority to lift the Section 901(j)(1) limitations, essentially if he believes that doing so is in the national interest of the United States and if he gives Congress 30 days’ notice of his intention of doing so. See Section 901(j)(5). Congressman Ryan has asked President Obama whether he has “made any direct or indirect commitment or promise of any kind, whether or not in writing, that [he] will exercise [his] waiver authority under Code section 901(j)(5) with respect to Iran.”

Putting aside the general merits of the Iran deal, and putting aside whether it makes sense to yield U.S. tax dollars to the Iranian government, the procedural posture of this controversy raises an interesting issue about statutory report-and-wait provisions. Section 901(j)(5) specifically requires that the President provide 30 days’ notice to Congress before he extends tax relief to countries like Iran. However, Congressman Ryan has asked for preliminary information about whether the administration will take any action under that statute. Apparently, the statutory “report and wait” procedure is not enough; Mr. Ryan wants the administration to “report and then report again and then wait.”

I don’t see much sense in this. If Congress specifies a report and wait procedure in a statute, it seems inappropriate for individual legislators to meddle further into executive branch decisions. I have previously examined a different tax report-and-wait provision and have doubted its constitutionality, and I’m frankly skeptical of the many statutes, in and out of the tax code, that make the executive branch report to Congress before taking executive actions. Whatever those statutes’ constitutionality, it appears that legislators may also doubt their efficacy, if those legislators are asking for reports about actions that will themselves require reports.

Andy Grewal

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2152153

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