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May 05, 2009
Obama Wants $190 Billion Tax Increase on Companies
Obama proposed to raise about $190 billion over the next decade by outlawing three offshore tax-avoidance techniques used by U.S. companies such as Caterpillar Inc. and Procter & Gamble Co. He also would make it riskier for Americans to stash money in tax-haven banks.
The tax system is “full of corporate loopholes,” Obama said at the White House today, as he outlined the plan along with Treasury Secretary Timothy Geithner. The tax proposals, which will be part of a detailed budget the administration releases later this week, would raise a total of about $210 billion over the next decade.
Geithner said that in addition to the tax changes, the Internal Revenue Service is making an unprecedented effort to strengthen.
The administration is going after a strategy that allows U.S.-based multinational companies to effectively hide from the Internal Revenue Service the role their foreign subsidiaries play in shifting profits into low-tax jurisdictions such as the Cayman Islands, according to the administration.
The proposal, affecting tax rules known as “check the box,” would net $86.5 billion in revenue between 2011-2019 by overhauling regulations created in Democrat Bill Clinton’s administration and later written into law by a Republican- controlled Congress after Clinton tried to withdraw the rules.
Tax Changes
The proposal, combined with a $60.1 billion plan to limit many expense deductions for American companies that take advantage of laws allowing them to defer tax on foreign profits and a $43 billion crackdown on abusive foreign tax credits, would be the biggest tax increase on U.S. corporations since 1986. Obama also would shift the burden of proof to individuals when the IRS alleges assets are being hidden in certain offshore bank accounts, the White House said in a statement.
“This is bad stuff,” Kenneth Kies, a tax lobbyist at the Washington firm Federal Policy Group, said of Obama’s plans. “This is going to be the biggest fight for the corporate community in the next two years.” Kies represents General Electric Co., Anheuser-Busch Cos. and Microsoft Corp., among others.
While the administration expects companies to lobby against the proposals, the president said his plan strikes loopholes that give multinational companies an unfair advantage over companies that operate only within the U.S.
In 2004, U.S.-based multinational corporations paid about $16 billion in U.S. taxes while earning about $700 billion offshore, or an effective tax rate of about 2.3 percent, according to the administration statement. The top marginal tax rate for U.S. companies is 35 percent; drug companies such as Amgen Inc. and technology companies such as Microsoft are among companies that make the biggest use of tax-deferral benefits.
Four Proposals
Obama and Geithner outlined the tax proposals before the White House releases a more detailed budget later this week.
The biggest of the requests is the repeal of the check-the- box rules, which took effect in 1997. The rules were designed to reduce paperwork for companies and the IRS by allowing companies to classify entities within their corporate structure in the most tax-efficient manner without inviting a tax challenge.
The Clinton administration realized that the rules made it easy for multinationals to create entities whose only purpose was to shift profits into low-tax countries and out of reach of the tax authorities, according to a January Government Accountability Office report that found 83 of the 100 biggest companies had subsidiaries in tax havens.
Repeal Recommendation
Once the assets were in the haven, the U.S. parent company borrowed from the subsidiary. The interest payments were deductible in the U.S. and tax-free in the haven, the GAO said. The nonpartisan congressional Joint Committee on Taxation recommended in 2005 that the rules be repealed.
The Clinton administration intended the rules to help U.S. companies minimize their foreign tax liability, not to avoid the IRS, said Andrew Lyon, a former Treasury Department tax official who is now a principal at PricewaterhouseCoopers LLP’s Washington office.
As a package, Obama’s proposal “is just a massive change and targeting what really has been a growth area for the U.S. economy: the overseas activities of U.S. firms,” Lyon said.
Stephen Shipman, a portfolio manager at Century Management, an Austin, Texas, hedge fund, said the result would be double- taxation for many companies that operate overseas.
“The simple thinkers in the White House will learn that such policies will result in less economic exchange, both overseas and here in the United States,” Shipman said.
When the Clinton administration tried to rescind the benefits of the tax rules in such cases, companies mounted a lobbying effort and got Congress to back the rule, a White House official said. Obama believes the rules have no economic substance other than avoiding U.S. tax, the official said.
Passive Income
“Check-the-box was responsible for a lot of currently taxable passive income disappearing from the system,” said Lee Sheppard, a tax lawyer and contributing editor at Tax Notes, a weekly industry journal.
Obama’s plan will be “surprising and cause a lot of pain” to U.S. companies, said Pamela Olson, a former top tax policy official in President George W. Bush’s Treasury Department. Many companies structured their international operations over the last decade based on rules such as check-the-box.
“Everything they’ve done is going to get wiped out,” Olson said. The Obama Treasury Department could have made most of the changes administratively, she said. By making it a legislative proposal, the new administration can count any revenue that results from the policy change in its budget.
Obama’s other corporate tax plans are patterned on those made in 2007 by House Ways and Means Committee Chairman Charles Rangel, a New York Democrat, an administration official said.
Expense Deductions
The first would defer most expense deductions, including those for interest paid, for U.S.-based multinationals, until U.S. tax is paid on the foreign income.
That would end a practice where companies deduct 35 cents of a dollar of interest paid to a foreign subsidiary that owes little or no tax in the country where it is located, the Obama administration official said. Such tax arbitrage, while now legal, reduces companies’ overall tax burdens often at the expense of the U.S. Treasury.
The proposal stopped short of an outright repeal of U.S. tax-deferral rules, as feared by a coalition of 200 companies and trade groups ranging from Alcoa Inc. to Yum! Brands, Inc. that was spearheaded by the Business Roundtable, U.S. Chamber of Commerce and National Foreign Trade Council, all Washington- based trade associations.
Letters to Leaders
In letters to congressional officials including House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, the trade groups warned such a repeal would hurt U.S. companies’ competition with their foreign rivals by increasing operating costs. That would make U.S. companies vulnerable to takeover and cost American jobs, they said.
Obama’s proposal would divert the revenue it collects to making permanent a research and experimentation tax credit that is popular with many of the same businesses protesting the end of the tax-deferral rules, the administration official said. That credit, which has expired 13 times, is due to expire again Dec. 31; while the research credit is renewed only temporarily, there has been only one year since 1986 when it and the tax deferral rules haven’t been on the books at the same time.
Another Obama proposal would end abuses of foreign tax- credit rules. U.S. tax law gives companies a dollar-for-dollar credit for taxes paid for foreign governments, but companies are projected to use techniques over the next decade to artificially inflate or accelerate those credits by $43 billion, the administration official said. The Obama budget would recoup that revenue, the official said.
Offshore Money
For individuals, Obama will propose shifting the burden of proof when the IRS believes money is being hidden offshore. In cases where individuals bank with financial institutions that haven’t agreed to report certain account information to the IRS, the individual will have to prove he or she doesn’t own the account, rather than requiring the IRS to prove ownership.
The change is projected to generate about $9 billion in new revenue between 2011 and 2019, and Obama believes it will yield substantially more, the administration official said.
Obama’s proposals could be superseded by recommendations by a panel led by Paul Volcker, whom the president named to make recommendations on tax overhaul by December, the administration official said. The panel won’t be constrained by the budget’s proposals, the official said.
Wild Thing's comment......
OH sure Hussein, that will sure pump some life into the economy.
Tax increases on companies are NOT paid by those companies. They pass along increased taxes, just like other increased costs, to their customers, and ultimately to the final consumers. So, when Obama tells us that he’s not raising taxes on individuals... he’s full of it.
I guess because he spent so much time in foreign countries growing up he never heard the old but true saying, “You can’t get blood out of a turnip”. Or “nothing from nothing leaves nothing.”
Obama is coming for the turnip. U.S. based multi-nationals will close the U.S. part of the business and operate as foreign companies. That breaks the access for the IRS to try to tax the profits made in a foreign country. It also kills revenue to the IRS from the part of the company that ceases to exist on U.S. soil.
More corporations will reincorporate off-shore and then import their goods into the USA. The big breweries are foreign owned. Most “big Pharma” is foreign owned, Fiat will soon own Chrysler operating assets. the list goes on and on. Why be an American corporation and put up with this crap? There are more stable countries with less political risk in the world.
Posted by Wild Thing at May 5, 2009 04:45 AM
Comments
Gawg! Why doesn't Osambo do something about that wart on his face?
It is GROSS!
Posted by: SSgt Steve at May 5, 2009 07:46 AM
And that's what is really going to cost this economy. People are already out of work. What will happen when families have to decide between paying the mortgage or rent or feeding the children? What if someone is on medication that isn't covered by pharmacy insurance? You think costs are high now, just wait awhile. Things are going to get mighty tight for a long, long time. He isn't thinking because he has enough to live on and have fun on. The majority of Americans don't and with him taxing the job creators, it's just going to get worse. That means less expansion, less jobs, less bonuses for the workers and lower starting salaries and no annual raises and more layoffs. But the government wants us dependent on them for everything. That's a bunch of hog wash!
Posted by: Lynn at May 5, 2009 08:21 AM
Lynn hit the nail on the head. Obama wants more corporate tax money so he can make more government jobs and pay out more "entitlements" to government dependent welfare people. Socialism, globalization, New World Order. Obama has put it all on the fast track.
Steve. I would rather wipe that smug look off his face.
Posted by: TomR at May 5, 2009 12:49 PM
If anyone can find Tax loopholes its Giethner. They say it takes a thief to catch a thief. So between those two, all major companies will be paying twice the tax.
Of course what these two bozos don't understand when these companies' Tax bill goes up they make it up someplace else. Like more moving off shore, closing local offices, laying off more workers. Bottom line is these companies are in business to make money. Berry and the 'Geitz' are rank amateurs compared to these corporate giants who they think they can bully, it aint gonna happen.
In all of this the American people are the loser, loss of jobs, income and eventually the loss of revenue to the government.
Posted by: Mark at May 5, 2009 05:34 PM
SSgt Steve, ROTFLMAO
I agree!!!!!!!!!!!!!!!!!!
Posted by: Wild Thing at May 5, 2009 05:36 PM
Lynn, excellent well said!!!!
Posted by: Wild Thing at May 5, 2009 05:38 PM
Tom, I agree,fastrack that sure is the
truth.
I wish he would take a LONG break let's
say for the next 4 years, that would be
good.
Posted by: Wild Thing at May 5, 2009 05:45 PM
Mark,yes that is the bottom line.
"In all of this the American people
are the loser, loss of jobs, income and eventually the loss of revenue to the government."
Posted by: Wild Thing at May 5, 2009 05:47 PM
