President Obama on Monday called for curbing offshore tax havens and corporate tax breaks to collect billions of dollars more from multinational companies and wealthy individuals, a move that appeals to populist anger among taxpayers but that likely will open an epic battle with major powers in U.S. commerce.
WASHINGTON — President Obama on Monday called for curbing offshore tax havens and corporate tax breaks to collect billions of dollars more from multinational companies and wealthy individuals, a move that appeals to populist anger among taxpayers but that likely will open an epic battle with major powers in U.S. commerce.
Obama, who has often promised to end tax breaks “for companies that ship jobs overseas,” estimated the changes would raise $210 billion over a decade. That revenue would help offset tax cuts for middle-income taxpayers as well as a permanent tax credit for companies’ research and development costs.
The proposal, which would not take effect until 2011, takes aim at what corporate executives consider to be one of the most critical features of the U.S. tax code: permission to indefinitely defer paying U.S. taxes on income earned overseas.
U.S. companies now can avoid paying taxes on foreign profits until they bring the money home. So a U.S. company doing business in Ireland, for example, must pay the Irish tax of 12.5 percent but would owe 22.5 percent to the U.S. Treasury (the difference between Ireland’s tax rate and the 35 percent U.S. tax rate) unless it reinvests the money overseas.
- Beloved Mama's Mexican Kitchen in Belltown to close
- Washington officer shoots men accused of earlier beer theft
- To retire at 55 takes big savings
- Queen Anne apartments -- at half the usual cost
- Bing no longer a search-engine blip
Most Read Stories
Obama argues the system penalizes companies that operate solely on U.S. soil. In 2004, the most recent year for which statistics are available, U.S. multinationals paid an effective U.S. tax rate of 2.3 percent on $700 billion in foreign profits, the administration says.
“It’s a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York,” the president said.
To level the playing field, Obama would bar firms from taking deductions for expenses that support their overseas investments until they pay U.S. taxes on the profits. He also would crack down on firms that overstate foreign tax bills. And he would reverse a Clinton-era rule that permits firms to transfer cash between countries more easily.
In practice, Obama officials said, that rule has been used to shift income away from higher-tax countries and into tax havens such as Bermuda and the Cayman Islands, allowing firms to reduce their tax bills.
Business groups were quick to condemn the plan.
“It would be like an earthquake for high-tech,” said Carl Guardino, chief executive of Silicon Valley Leadership Group, an industry trade association. “On a Richter scale of 1 to 10, this would be a 12.”
Tech bellwethers such as Hewlett-Packard, IBM, Cisco, Microsoft and Google lowered their tax by a combined $7.4 billion in their most recent fiscal years. Through the years, these five companies have avoided U.S. income taxes and foreign withholding taxes on a combined $72 billion in undistributed earnings from foreign operations.
By reinvesting earnings overseas, U.S. companies insulate themselves from much higher tax rates had the money been made in their home country.
Google would have had an effective tax rate of 45.2 percent instead of 27.8 percent last year if it hadn’t been able to capitalize on lower rates overseas, according to the company’s annual report. Without the lower foreign rates, Google’s 2008 tax bill would have been $1.02 billion higher.
HP reaped a $1.77 billion benefit in fiscal 2008 while Cisco and Microsoft each saved more than $1.6 billion, according to the companies’ annual reports. IBM’s foreign tax advantage totaled about $1.3 billion.
High-tech isn’t the only beneficiary. General Electric lowered its effective tax rate by nearly 27 percent last year by keeping profits outside the United States, a savings of more than $5 billion in potential U.S. taxes.
Obama reasons that U.S. companies would create more U.S. jobs if there is less of an advantage to setting up operations overseas.
But Guardino disagrees, maintaining that, by taking advantage of their biggest growth opportunities, high-tech firms and other U.S. companies use the revenue to hire more workers in the United States.
Such companies and individuals have some of the mightiest lobbying armies, as well as influential patrons in Congress, testing Obama’s ability to marshal support.
Congressional Republicans, usually quick to condemn tax-increase proposals, were relatively quiet, perhaps reflecting wariness of defending tax shelters.
Iowa Sen. Charles Grassley, the senior Republican on the Senate finance panel and a frequent critic of tax schemes, said Obama could “count on my support” to crack down on abuses. “But if he’s using tax shelters as a stalking horse to raise taxes on corporations at the cost of U.S. jobs, he’ll lose me.”
Compiled from The New York Times, The Associated Press and The Washington Post