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US Should Leverage Tax Rules To Deter Business With Russia

By Reuven Avi-Yonah · 2022-04-05 17:19:14 -0400 ·

Reuven Avi-Yonah
Reuven Avi-Yonah
In response to Russia's invasion of Ukraine, U.S. Senate Finance Committee Chairman Ron Wyden, D-Ore., has proposed to deny foreign tax credits for U.S. companies earning income in Russia and Belarus. This proposal is similar to current denials of the foreign tax credit to countries like Iran, North Korea, Syria and Sudan.

Wyden's plan would also deny sanctioned individuals the benefits of the U.S.-Russia tax treaty and would give the U.S. Department of the Treasury the ability to add people to that list.

I believe these steps are fully justified but need to be even broader. Specifically, I would propose three measures. The U.S. should (1) deny foreign tax credits for taxes paid to Russia or Belarus; (2) deny U.S. businesses that operate in Russia or Belarus the global intangible low-taxed income, or GILTI, preferential rate; and (3) terminate the U.S. tax treaty with Russia.

Foreign Tax Credits

The most obvious way in which the U.S. subsidizes Russian President Vladimir Putin's war is by allowing foreign tax credits for taxes paid to Russia or Belarus. By reducing U.S. taxes on U.S. businesses operating in Russia, effectively the U.S. government is indirectly transferring funds to the Russian government by reducing its tax revenue dollar for dollar on any such taxes.

I fully support Wyden's proposal to deny such credits to U.S. companies that continue to do business in Russia and Belarus. This proposal is in line with current denials of the foreign tax credit to Iran, North Korea, Syria and Sudan, but it is much more meaningful because there is almost no U.S. investment in those countries.

Moreover, I believe no legislation is needed to implement this step. Under Internal Revenue Code Section 901(j), credits can be denied to the following countries:

(2) Countries to which subsection applies.

(A) In general. This subsection shall apply to any foreign country —

(i) the government of which the United States does not recognize, unless such government is otherwise eligible to purchase defense articles or services under the Arms Export Control Act,

(ii) with respect to which the United States has severed diplomatic relations,

(iii) with respect to which the United States has not severed diplomatic relations but does not conduct such relations, or

(iv) which the Secretary of State has, pursuant to section 6(j) of the Export Administration Act ... designated as a foreign country which repeatedly provides support for acts of international terrorisms.[1]

In practice, the U.S. does not currently conduct diplomatic relations with Russia or Belarus. Any current discussions take place directly between Russia and Ukraine, and U.S.-Russia relations are at their lowest ebb since the Cold War. Therefore, foreign tax credits can be denied under Section 901(j)(2)(iii).

In addition, Russia and Belarus directly and repeatedly support acts of international terrorism through sending mercenaries to inflict terror on civilian populations in Ukraine.

Terrorism is broadly defined as the unlawful use of violence and intimidation, especially against civilians, in the pursuit of political aims.

It is hard to argue that the war in Ukraine does not constitute terrorism under this definition. It is unlawful under international law as well as Russia's treaty commitments to Ukraine and the U.S. It involves violence and intimidation against civilians, four million of whom have fled Ukraine to avoid such violence. It is in pursuit of political aims, namely Putin's desire to revive the Soviet empire.

Thus, the U.S. secretary of state can designate Russia as a "foreign country which repeatedly provides support for acts of international terrorisms." No legislation is needed. If this is challenged in court by beneficiaries of the foreign tax credit, any such challenge is likely to lose — and in any case will not be decided in the likely duration of the war.


The IRC currently subsidizes U.S. corporations operating in Russia and Belarus through the preferential GILTI rate — zero on the exempt 10% return on tangible assets and 10.5% above that. This subsidy also directly benefits both U.S. companies operating in Russia and the Russian regime by encouraging such investments.

Any such investments should be subject to the full U.S. corporate rate by denying them the GILTI deduction as well as the exemption for the deemed return on tangible assets.

This change requires legislation, but there is a chance it would receive bipartisan support given that both Democrats and Republicans have expressed their dismay at the actions of the Putin regime.

GILTI was a Republican innovation and denying the GILTI preference to investments in Russia is fully consistent with the argument that a lower GILTI rate is needed to maintain American competitiveness. There is no valid U.S. interest in maintaining competitiveness for U.S. companies operating in Russia.

The U.S.-Russia Tax Treaty

By its terms, the U.S. can terminate the tax treaty with Russia effective six months from a unilateral announcement by the U.S.[2] This step does not require legislation and can be announced by the Biden administration tomorrow.

It is important to terminate the treaty for three reasons. First, terminating the treaty signals that the U.S. is unwilling to maintain normal economic relations with Putin's Russia.

Second, Article 23 of the treaty requires the U.S. to provide credits for Russian taxes. This provision is independent of the credit provided by the IRC, and therefore denying foreign tax credits while retaining the treaty eliminates the effectiveness of the denial of foreign tax credits.

While legislation to deny foreign tax credits can override the treaty, any unilateral denial of foreign tax credits under IRC Section 901(j) is likely to fail unless the treaty is terminated.

Third, the treaty encourages U.S. investment in Russia by reducing any withholding taxes that apply to such investment, as well as Russian investment into the U.S. Terminating the treaty will discourage such investment in the future and give U.S. businesses an incentive to exit Russia in the next six months, before the termination goes into effect.

Overall, the U.S. should do anything in its power to deny the Putin regime resources to wage its war in Ukraine. Denying foreign tax credits and the GILTI tax preference, and terminating the treaty are appropriate and necessary steps for doing so.

Reuven S. Avi-Yonah is the Irwin I. Cohn Professor of Law and director of the international tax LLM program at University of Michigan Law School.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the organization, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] 26 U.S.C.S. § 901 (LexisNexis, Lexis Advance through Public Law 117-80, approved Dec. 27, 2021).

[2] U.S.-Russia Tax Treaty, Art. 28,

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