StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Taxing U.S. Multinationals

06 May 2009
Posted by Pete Davis

Monday, President Obama released details of how he proposes to raise $210 b. over the next 10 years from taxing U.S. multinationals on their overseas income and from going after U.S. taxpayers using offshore tax havens.

Deductions associated with deferred overseas income would not be deductible, except for R&D, starting in 2011.  Foreign Tax Credit loopholes would be closed.   "Check the Box" foreign subsidiaries would be required to file taxes as separate corporations.  Tax Havens would be subject to increased disclosure, withholding taxes, and IRS enforcement.  Overseas banks will have to file 1099s on income earned by Americans.

If you accept that U.S. corporations should pay U.S. tax on their worldwide income with a tax credit for foreign taxes paid, then President Obama's proposals make sense.  However, many businesses argue they are at a competitive disadvantage because most of their international competitors are only taxed on the income they earn domestically under "territorial" tax systems.  Their foreign earnings are not taxed by their home countries.  U.S. corporations also decry our 35% top marginal tax rate, the second highest in the world behind Japan, and our employer paid health care, a burden assumed directly by the government in most other countries.

On July 26, 2008, the Joint Committee on Taxation published a detailed analysis of this issue.  It concluded that, on balance, U.S. corporations would be worse off if we adopted a territorial system because they would lose deductions, primarily interest deductions, on tax-exempt foreign income.

The debate goes on.

The reaction from Congress to President Obama's tax proposals was hardly enthusiastic.  Senate Finance Chair Max Baucus (D-MT) expressed concern about the global competitiveness of U.S. firms and called for more study.  "I want to make certain that our tax policies are fair and support the global competitiveness of U.S. businesses. These policies must be designed to encourage economic growth and create good-paying jobs Americans need right now. The proposals announced by the president today set the table for tax reform, and I look forward to sitting down with the Administration soon to take up these issues."  House Ways and Means Chair Charlie Rangel (D-NY) was more supportive, but stopped short of endorsing President Obama's proposals.  "For too long, our tax laws have rewarded companies that invest and keep their money overseas and turned a blind eye to the use of tax havens by the wealthy. Closing these loopholes and investing the money in American jobs will help millions of American families regain some of the economic security they lost in recent years."  Republican leaders decried increased foreign ownership of U.S. firms that would result.  Senate Finance Ranking Republican Chuck Grassley (R-IA) said, "Congress needs to look at whether these tax increases are fair, whether American workers will lose their jobs, and whether U.S. companies will fall behind foreign competition and even become more vulnerable to foreign acquisition."  Clearly, Mr. Obama's tax proposals will face quite a fight.

Anyone who performs is a target

As far as I can tell, Obama and his team view people and companies that are successful at what they do as nothing other than lambs to shear for new revenue.

But lambs only have so much wool to give. If you cut deeper, you kill them instead.

Indian reaction

From Indiatimes Infotech:

"BANGALORE: India's home grown IT companies actually have something to cheer from Obama's tax plan. The plan, if it goes through, will make the likes of TCS, Infosys and Wipro more price competitive against their US counterparts like IBM, HP and Accenture."

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