A bipartisan duo on the Senate panel with jurisdiction over tax and trade legislation is calling on the Biden administration to scrap or at minimum suspend a treaty with Russia that reduces taxes levied on cross-border profits amid rising tensions over its attack on Ukraine.
Senate Finance Committee members Catherine Cortez Masto, D-Nev., and John Cornyn, R-Texas, wrote Thursday to Treasury Secretary Janet L. Yellen and Secretary of State Antony J. Blinken that such steps are needed to counter punitive action taken against U.S. businesses by Russian President Vladimir Putin’s regime and deprive it of cash needed to finance its war against Ukraine.
“Unfortunately, Russia’s illegal and unprovoked war in Ukraine, as well as countless other actions, show that President Putin does not intend to pursue a path of peace and global cooperation,” the senators wrote.
The senators are urging a response to Putin’s August decree suspending tax treaty benefits with the U.S. and other countries over sanctions. Cortez Masto and Cornyn said the move is more evidence that it’s time to end the 1994 treaty that was intended to bring closer economic ties after the Cold War subsided.
Russia invaded Ukraine in early 2022, and the U.S. has since pledged support for Ukraine in the war. That has included sending Ukraine billions of dollars for military and economic aid, weapons and humanitarian needs. The U.S. also imposed sanctions on Russian companies and elites meant to undercut its ability to continue the war in Ukraine.
But the future of monetary aid for Ukraine is looking hazier. Some Republicans have objected to the continued spending to back Ukraine, questioning Kyiv’s path to victory, and sought more information or oversight.
The Biden administration requested $106 billion in supplemental funding last week for Ukraine, Israel, the Indo-Pacific region and border security in an attempt to tie those needs together, but GOP lawmakers are pressing to decouple some of the funding requests.
Tax treaties are normally within the purview of Senate Foreign Relations, but the suggestion from Cortez Masto and Cornyn wouldn’t require congressional approval. The pair said in their letter that with Russia now failing to deliver benefits for U.S. investors and firms, ending the treaty would make sure Russian businesses don’t get a leg up doing business in the U.S.
The Russia tax treaty is similar to many others the U.S. has in effect around the world in that as a general matter it prevents income earned by U.S. firms from sources in Russia from being taxed twice, once by the IRS and again by the Russian government. The same principle applies to Russian companies operating in the U.S.
New world, new tactics
The war in Ukraine has flipped business as usual on its head, however.
Now a large number of U.S.-headquartered firms and others around the world have stopped operating in Russia, are scaling back investments or at minimum have suspended investments until hostilities cease.
According to a database maintained by the Yale School of Management, U.S. companies that continue to operate as usual in Russia range from fast-food burger chain Carl’s Jr. to chemical manufacturer Huntsman Corp. Even those who’ve defied calls to exit Russia took a hit when Putin suspended their treaty benefits, however.
And sanctions have limited major Russian companies’ ability to make money in the U.S., although they aren’t uniform and are applied to specific individuals and firms. Major financial institutions like Rosbank and VTB have been targeted, for instance. Oil and gas giant Lukoil is subject to some sanctions but is still able to operate in the U.S.
U.S. companies that reported lobbying on Russia-related sanctions and other issues in the third quarter of this year include oil major Chevron Corp., investment bank Morgan Stanley and U.S. Steel Corp. A permanent end to tax treaty benefits could potentially impact those and other firms.
Last year, Senate Finance Chair Ron Wyden, D-Ore., and now-retired Sen. Rob Portman, R-Ohio, proposed a plan to strip U.S. tax breaks from companies that keep doing business in Russia and its ally Belarus due to the war in Ukraine. But the draft bill never gained much traction.
Tax treaties with other parts of the world have been in the spotlight of late.
While the U.S. can’t negotiate a formal tax treaty with Taiwan because of its unique status, lawmakers have proposed amending the tax code to allow similar benefits. They’re aiming to boost domestic chip manufacturing, a notable industry in Taiwan, and to tighten ties with Taiwan amid tensions with China.
In recent years, tax pacts have tended to take far longer to go into effect though, so fully abandoning the treaty would likely be a permanent choice for at least years to come.
That’s in part because Sen. Rand Paul, R-Ky., typically opposes certain treaty provisions over privacy concerns, and they then take longer to gain the needed approval for ratification from the Senate.
For example, the Senate gave its blessing this summer to a tax treaty with Chile that could help boost clean energy supply chains after more than a decade of delays.
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