International Tax

Obama Wants International Tax Reform

By Martin DiGiovine
May 05, 2009

 

On Monday May 4, 2009, at an international tax forum held at the White House, President Obama introduced his plan to crack down on off-shore tax havens and remove tax incentives available to multinational corporations.

 

The current Internal Revenue Code contains deferral rules that are advantageous to corporations that invest overseas. Under the President’s proposal, these rules would be reformed so that companies would not be able to claim deductions on their U.S. tax returns for offshore investments until they pay taxes on the offshore profits.

 

The code also contains loopholes that allow U.S. businesses that pay foreign taxes on overseas profits to claim a credit on their U.S. tax return for foreign taxes paid. The President plans to eliminate these loopholes to encourage more domestic job creation and less outsourcing of jobs by American corporations caused by 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”.

 

Another loophole that the President proposes to eliminate is the practice of setting up subsidiaries in the Cayman Islands and other off-shore tax havens to avoid paying U.S.  taxes. “It's a loophole that lets subsidiaries of some of our largest companies tell the IRS that they're paying taxes abroad, tell foreign governments that they're paying taxes elsewhere -- and avoid paying taxes anywhere”, the President said.

 

Under the President’s proposal, foreign financial institutions would be required to disclose to the IRS the names of American investors who have deposits in foreign accounts. This comes on the heels of a recent increase in IRS focus on taxpayers that have undisclosed deposits in foreign banks. The 2010 budget provides funding to hire 800 new IRS staff specifically for international tax enforcement.

 

The President painted the situation as one in which a small number of corporations use tax loopholes to shirk their patriotic duty to pay taxes, and receive more benefit from creating jobs overseas than from creating jobs for Americans. He blamed the problem on a flawed tax code written by “well-connected lobbyists” on behalf of “well-heeled interests and individuals”.

 

Opponents of the proposal, however, see things from a different perspective. They argue that these code provisions are necessary to level the playing field for U.S. corporations in a global economy. They point out that many foreign rival corporations enjoy favorable tax treatment from their home countries, and without the beneficial rules provided under the current tax code, U.S. companies would fall behind and become vulnerable to foreign takeovers, ultimately resulting in more job losses here at home.

 

U.S. corporations are already under enormous pressure due to the current economic downturn, and they may not be able to survive any further burdens placed on them by the government at this time. House Ways and Means Committee member Dave Camp (R-Mich) said raising taxes on firms like Caterpillar and Cisco during a recession is the wrong action to take.

 

Senate Finance Committee Chairman Max Baucus (D-Mont) took a more cautious stance by saying more study is needed to see how American companies would be affected by the proposals: "I want to make certain that our tax policies are fair and support the global competitiveness of U.S. businesses.”