Corporate Tax Reform - The president's tax plan can be the start of an important discussion.

Washington Post Editorial: Corporate Tax Reform - The president's tax plan can be the start of an important discussion.
Copyright by The Washington Post
Tuesday, May 5, 2009
http://www.washingtonpost.com/wp-dyn/content/article/2009/05/04/AR2009050403256.html


EXPECT President Obama's international tax proposal to set off a firestorm in Congress and the business community. The proposal, which will be released in more detail when the president's full budget comes out in the next few days, would alter tax rules so that companies are less able to shift profits to avoid U.S. taxation while also cracking down on tax havens for companies and individuals. In a speech yesterday, the president billed the plan as a revenue raiser, which it would be, and a plan to create jobs, a more contentious assertion.

Corporate tax policy is certainly in need of reform. The United States has the second-highest corporate tax rate in the world, though at just over one-tenth of the budget, the overall share of revenue it raises is remarkably small, both because the corporate tax base is chopped up by so many deductions, exemptions and credits, and because larger companies have great flexibility in shifting their profits around the world to lower their tax bills. In December, the Government Accountability Office reported that 83 of the nation's 100 largest companies have subsidiaries in tax havens, with Citigroup, Morgan Stanley and News Corp. (think Fox News) leading the way, each with more than 150 subsidiaries in tax haven locations. Many companies have legitimate business in these places, and many that are there solely to minimize their tax bills are doing so legally. Still, there is ample room for tax streamlining, given, for instance, the imbalance between domestic companies that are not able to shift profits and multinationals that can to some extent pick and choose where they pay taxes. Additionally, it's good to see the administration looking for revenue to promote investment and reduce the deficit.

However, some of the changes the administration is contemplating could harm U.S. competitiveness. Higher tax burdens would put U.S. corporations at a disadvantage compared with foreign competitors that do not face the double tax regime to which some corporations would be subject. The administration cited numbers showing that in 2004, U.S. multinationals paid $16 billion in taxes on $700 billion in foreign earnings, but it did not mention the $120 billion in foreign taxes they paid that year. Trade groups will argue that the increased cost of doing business will lead to job losses in the United States, not the gains promised by Mr. Obama.

The corporate tax code is a mess -- the rates are too high and the complexity extreme. One promising approach would be to pair the types of reforms the administration is talking about with a reduction in the overall rate, which would be advantageous for both multinational and domestic companies -- though, of course, it would reduce the amount of revenue that would be raised as a result of the policy. While it was never a centerpiece of his campaign, Mr. Obama supported reducing corporate income tax rates during his run for the presidency as long as it was done in a revenue-neutral manner. This proposal could be a way to get that broader discussion of corporate tax reform started.

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New York times Editorial: Tax Salvos
Copyright by The New York times
Published: May 4, 2009
http://www.nytimes.com/2009/05/05/opinion/05tue1.html?ref=global


There is something wrong with a system where some of the largest and most profitable companies contribute a pittance to the Treasury. And President Obama was right to call attention to the problem when he proposed corporate tax increases on Monday. The administration noted that in 2004, the latest year for which data were available, American multinational corporations paid about $16 billion on $700 billion in foreign earnings, an effective tax rate of about 2.3 percent.

A deeper problem, however, is that, with few exceptions, there are no easy fixes to tax problems posed by global profits. The Obama proposals oversimplify the challenge, both technically and politically.

One of the most controversial proposals would delay deductions against overseas profits until those profits are brought back to the United States. In theory, that makes perfect sense, because matching deductions and income in the same year is a fundamental principle of United States tax law.

In practice, applying the matching principle to overseas operations could put American companies at a competitive disadvantage to foreign companies that do not face United States tax laws. It could even impede job creation in the United States — exactly the opposite of what the Obama administration intends. That’s because some of the expenses incurred in generating foreign profits are for support jobs in the United States, like human resources and accounting positions. If companies cannot write off those employment expenses in the year they are incurred, they may move the jobs overseas.

The administration has also proposed to make it harder to abuse the foreign tax credit, a provision that allows companies to claim a credit on their American taxes for taxes paid to another country. No one objects to curbing abuse. Unfortunately, the extent of the alleged abuse is unclear. That presages a much tougher fight, with arguments on each side as to whether the proposal is a mere loophole closer or a fundamental shift in how the credit is calculated and applied.

The administration is on firmer ground in proposing to change a practice whereby companies shift income from foreign subsidiaries to foreign tax havens, erasing their United States tax liability in the process. The practice was first allowed in the Clinton administration, despite warnings at the time that it would lead to aggressive tax avoidance. That is exactly what has happened, reducing tax revenue by billions of dollars a year.

The Obama administration deserves credit for putting some of the problems of the corporate tax system on the table, but we hope it is only a warm-up act. Once the economy begins to recover, comprehensive reform of the tax system will be needed to raise enough money in a way that spreads the burden as widely as possible. Done properly, that would inevitably require new tax sources, like a value-added tax or energy taxes — or both. Enacting those would be a monumental challenge that would make enacting the current package of corporate proposals look puny by comparison.






Obama takes aim at US multinationals
By Tom Braithwaite in Washington
Copyright The Financial Times Limited 2009
Published: May 4 2009 17:10 | Last updated: May 4 2009 17:10
http://www.ft.com/cms/s/0/412f2784-38b7-11de-8cfe-00144feabdc0.html


President Barack Obama on Monday outlined plans to claw back more than $100bn in tax revenues by preventing US multinational companies from offsetting overseas investment against their taxable income.

The initiative – which combined with other reforms such as a crackdown on tax havens is designed to raise $210bn over 10 years – is set for a fierce backlash from some of the biggest US companies who have already warned that it would make them less competitive and cost American jobs.

However, Mr Obama – developing a campaign pledge – said the current tax code incentivised companies to create overseas jobs at the expense of the US.

The administration said in a statement: “If the company… invests and creates jobs overseas through a foreign subsidiary, it does not have to pay US taxes on its overseas profits until those profits are brought back to the United States, if they ever are.”

“As a result, this preferential treatment uses US taxpayer dollars to provide companies with an incentive to invest overseas, giving them a tax advantage over competitors who make the same investments to create jobs in the United States. “

Mr Obama said the aim was ”ending indefensible tax breaks and loopholes, which allow some companies and some well-off citizens to evade the rules that the rest of America lives by”.

In a letter to Congress six weeks ago, more than 200 companies, including General Electric, Caterpillar and Johnson & Johnson, warned that repealing the ability to defer US taxes by investing abroad would upset “the competitive balance between US and foreign companies. This will result in a loss of jobs for Americans and serious negative impacts on the US economy.”

In a fillip to business contained in the tax reform, Mr Obama proposed making permanent a research and experimentation tax credit, which is due to expire at the end of this year.

Tim Geithner, US Treasury secretary, said they were “common sense changes designed to restore balance to our tax code.”




Obama squares up to corporate America
By Edward Luce and Tom Braithwaite in Washington and, Francesco Guerrera in New York
Copyright The Financial Times Limited 2009
Published: May 5 2009 03:00 | Last updated: May 5 2009 03:00
http://www.ft.com/cms/s/0/79255bee-390d-11de-8cfe-00144feabdc0.html


Barack Obama squared up on Monday for what looks likely to be his administration's first major battle with big business, when he unveiled crackdowns on offshore tax avoidance and evasion by US companies and individuals.

Mr Obama, who campaigned relentlessly on the issue of closing offshore loopholes, said the steps he announced would raise $210bn over 10 years and "make it easier" for companies to create jobs in Buffalo, New York, rather than in Bangalore, India.

He said the measures, which would be enforced by the creation of nearly 800 new jobs at the Internal Revenue Service, would raise revenues to help pay for the permanent extension of the Research and Development tax credit for US corporations.

But corporate America reacted with dismay, saying the rules - which will affect multinationals such as General Electric and Procter & Gamble - would put US companies at a disadvantage to foreign rivals.

"It is the wrong idea, at the wrong time for the wrong reasons," said John Castellani, Business Roundtable president. "It will cripple growth, reduce the competitiveness of US companies overseas and destroy jobs."

The National Association of Manufacturers called the proposals "disastrous".

The steps announced by the president would include closing down the notorious "check box" loophole that enables companies to avoid US and foreign taxes by shifting income to subsidiaries based in offshore tax havens.

Mr Obama cited a Cayman Islands building where more than 18,000 US companies are housed. "Either this is the biggest building in the world or it is the biggest tax scam in the world," he said.

The administration says more than a third of US foreign profits in 2003 came from Bermuda, the Netherlands and Ireland. It also estimated that US companies paid an effective tax rate of just 2.3 per cent on the $700bn they earned in foreign profits in 2004.

Under Mr Obama's proposals - likely to be included in this year's budget document - US companies would no longer be able to claim deductions against their tax bill before they had paid taxes on offshore profits. The administration would also close the loophole whereby companies that claim a US credit on taxes paid overseas then inflate and accelerate those credits.