Tuesday, May 05, 2009
San Jose Mercury News (MCT)
SAN JOSE, Calif. — President Barack Obama has outlined a series of proposals for cracking down on overseas tax havens and eliminating tax breaks for U.S. corporations that do business overseas — a sensitive subject for tech companies that have extensive global operations.
The president did not propose eliminating the current law that allows U.S. companies to defer taxes indefinitely on overseas income, which some industry leaders had feared. But his call for ending some deductions drew negative reaction from groups representing tech and other industries, which argue that the changes would make it more difficult for U.S. companies to compete abroad.
"This is a $60 billion hit on American employers that their foreign competitors won't feel," said Carl Guardino, CEO of the business-oriented Silicon Valley Leadership Group, referring to one of the president's proposals. Many big tech companies, such as Hewlett-Packard, Oracle and Cisco, report that half or more of their revenue comes from overseas.
Obama, echoing statements he made in last year's campaign, said he is attempting to overhaul a tax system that he described as "full of corporate loopholes" and excessive rewards for U.S. companies that create jobs in other countries.
"One of the strengths of our economy is the global reach of our businesses. And I want to see our companies remain the most competitive in the world," Obama said.
But he cited a 2004 study that found U.S. multinationals paid $16 billion in taxes on $700 billion of foreign earnings. He added: "The way we make our businesses competitive is not to reward American companies operating overseas with a roughly 2 percent tax rate on foreign profits, a rate that costs taxpayers tens of billions of dollars a year."
The president said his combined proposals would raise $210 billion over 10 years, which he said would help with efforts to reduce taxes for middle-income individuals and others. He said nearly $75 billion would go to extend permanently the current tax credit for companies that do research and experimentation in the United States, which is set to expire this year.
The proposals will require legislative approval, however, and reaction in Congress was mixed. House Speaker Nancy Pelosi, D-Calif., said in a statement that she will work to advance the president's proposals, which she said would "restore fairness to the tax code."
Senate Republican leader Mitch McConnell of Kentucky, however, said Obama's plan amounts to a tax increase on U.S. companies and "seems particularly harmful to our shared goal of creating more American jobs."
Obama's proposals focus on two areas: curbing tax breaks for U.S. companies that operate in other countries, and cracking down on abuse of overseas tax havens by some companies and wealthy individuals.
The first area is of particular concern to big tech and pharmaceutical companies, which tend to have large multinational operations. Currently, they can defer paying U.S. income taxes on revenue from overseas subsidiaries for as long as they reinvest the money abroad.
Companies may still pay taxes to foreign countries where they do business, but those rates tend to be lower than the U.S. tax rate. Through "deferral," big tech companies have avoided paying U.S. taxes on billions in overseas revenue.
Without "deferral," for example, Google might have been required to pay an additional $1 billion last year on a tax bill that amounted to roughly $1.6 billion, according to a regulatory filing.
Google said "it is too early to evaluate" Obama's proposals.
While not eliminating deferral, Obama would change the law that lets companies take an immediate deduction on their U.S. income tax for business expenses tied to overseas operations, such as interest on a loan to build a foreign factory. According to a White House fact sheet, the proposal would raise $60 billion over nine years by requiring companies to defer those deductions until they pay U.S. taxes on the income from those operations.
A second proposal would raise $40 billion over nine years by eliminating foreign tax credit loopholes. It would bar companies from deducting foreign tax payments on overseas income unless they are paying U.S. taxes on that revenue.
Representatives for Oracle and Cisco had no comment. HP issued a statement saying that any tax reforms should be "fair and encourage innovation and economic growth." A Cisco spokesman previously said abolishing deferral would be unfair.
In the second category of changes, the administration said it would raise $86.5 billion by eliminating loopholes that make it easier for companies to avoid taxes by shifting income from one subsidiary to another. Obama also proposed measures to crack down on individuals who try to hide money overseas, and the hiring of 800 new IRS employees to focus on international enforcement.
OBAMA'S TAX PROPOSALS
President Obama outlined six proposals for overhauling the tax system, most aimed at changing how the tax code treats foreign income and investments. The revenue estimates are for the period of 2011 to 2019.
Ending deductions for expenses tied to overseas expansion, unless companies are paying income tax on revenue from those operations; would raise $60 billion in tax revenue.
Allowing deductions for foreign tax payments only if the income is subject to U.S. taxes; would raise $43 billion.
Establishing a permanent tax credit for spending on research and experimentation in the United States; would cost $74.5 billion.
Eliminating loopholes that let U.S. corporations avoid taxes by shifting income from one subsidiary to another in a low-tax or no-tax country; would raise $86.5 billion.
Increasing enforcement and reporting requirements for overseas financial institutions and wealthy individuals who deposit money overseas; would raise $8.7 billion.
Hiring 800 IRS employees to focus on international enforcement; the White House says this will raise more revenue than it costs, but no dollar figures were provided.
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