Obama vows tougher tax policies on outsourcing companies and offshore tax havens

[Naveed Yaseen]

WASHINGTON (May 05 2009): President Barack Obama vowed on Monday to overhaul tax policies that he said reward companies for shifting US jobs overseas and that allow wealthy people to evade taxes using offshore accounts. The White House estimates the plan would save $210 billion over the next decade.

In one proposal businesses are poised to fight, Obama would tighten tax-code provisions that allow firms to defer paying taxes on profits they make overseas as long as those earnings are plowed back into the foreign subsidiaries.

That portion of his plan has drawn opposition from big multinational firms as Pfizer Inc and Oracle Corp. The president said he also would close loopholes and bolster enforcement to prevent companies and individuals to prevent overseas tax avoidance. "The steps I am announcing today will help us deal with some of the more egregious examples of what is wrong with our tax code," Obama said at a joint announcement with Treasury Secretary Timothy Geithner.

"It is the downpayment on the larger tax reform we need to make our tax system simpler and fairer and more efficient for individuals and corporations." Currently, US firms are allowed to defer paying taxes on profits earned overseas if they put those profits back into their foreign subsidiaries. Critics say those rules encourage businesses to bolster their foreign operations instead of creating jobs at home.

During his campaign last year, Obama promised to change those provisions. But an array of firms signed a letter to congressional leaders in March opposing changes to the "deferral" provision. The letter, signed by 200 companies and trade groups like the US Chamber of Commerce, said the firms would not be on a level playing field with international rivals, many of which are not required to pay taxes at home on overseas entities.

Pfizer, Oracle, Microsoft Corp, Johnson & Johnson and General Electric Co were among the firms that signed the letter. Under the Obama plan, companies would no longer be able to deduct expenses supporting their overseas operations until they pay taxes on their profits. The plan also would end a practice by which some firms take big deductions against their taxes by inflating the amount of foreign taxes they have paid, Obama aides said.

The proposal also includes extension of a research and experimentation tax credit the administration says businesses have been pushing for, which is expected to give a tax cut of $74.5 billion over 10 years to companies investing at home. Drew Lyon, a tax expert at PriceWaterhouse Coopers, said the changes to the "deferral" provision would be sweeping, since half of multinationals firms' income is earned abroad. "It's really hitting most Fortune 100 companies that depend to a great deal on growth of foreign markets for growing their total earnings," Lyon said.

US officials said Obama's plans were balanced and would not put excessive burdens on firms. They said studies looking at effective tax rates - the amount paid after deductions - show the United States is in the middle range of other Group of Seven countries when it comes to corporate taxation. Obama's proposals on deferral mirror legislation drafted by House Democrats, who the Obama administration consulted in crafting its plan.

Several lawmakers, including US House of Representatives Ways and Means Chairman Charles Rangel, signalled support for Obama's proposals, many of which must go through Congress. But Senator Max Baucus, Democratic chairman of the Senate Finance Committee, offered a note of caution, calling for more study of how US businesses would be affected.

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