Obama Targets US Multinationals' Foreign Profits

Hot on the heels of (now) President Obama's co-sponsorship of the Stop Tax Haven Abuse Act comes another prong to the US administration's attack on so called offshore tax havens.  On 4 May President Obama announced that US companies would be targeted in a drive to minimise current legitimate tax avoidance practices.  In what might be seen as an act of economic nationalism and a return to less market driven principles, the US has announced measures which are targeted to raise some US$210bn over the next 10 years.  Even in the context of the eye watering figures being bandied about in relation to bank bailouts and predicted losses of GDP in the current credit crunch, these are large sums.

The key 'culprits' named by the US administration are the Cayman Islands, Ireland, the Netherlands and Bermuda who between them are said to have accounted for a third of US foreign profits in 2003.  Jurisdictions such as Luxembourg, Switzerland and Singapore are also in the US's sights. The nub of the proposed changes is that profits earned abroad would be taxed as if they had been earned in the US, which would represent a major divergence from the rest of the world where profits earned abroad are not taxed at home.  The main elements of the proposals are:

• US companies would no longer be able to claim deductions against their US tax bill before they had paid taxes on offshore profits.  In effect, the tax on the foreign income is deferred until such time as it is repatriated to the US (US$80bn raised)
• The closing of a loophole whereby companies can claim a US tax credit on taxes paid overseas (US$43bn raised)
• An end to the "checkbox" loophole whereby US companies can shift income to subsidiaries based in lower tax jurisdictions, which is in reality another form of transfer pricing (US$87bn raised)

Much of the thrust of the measures is designed to accelerate the payment of taxes to the US Treasury and to end US companies' ability to defer their fiscal liabilities.

This initiative represents a new dimension in the desire to raise funds for the US authorities.  Whereas the Stop Tax Haven Abuse act was designed to capture illegal activities, the new proposals are aimed at reducing currently legitimate ways of avoiding tax.  With an effective rate of 2.3% paid on the US$700bn compared to the US standard rates of 35% it is easy to see why this has become a target for the US administration.  However some would argue that it is the US's notoriously complex tax code and already high rates of corporate tax which have created the problem - some have argued that a return to the US's roots as a free trade area employing internationally competitive tax rates and arrangements is the only real way to stimulate the economy, increase tax rates and create US jobs.

The law of unintended consequences is also likely to come in to play, potentially with the perverse effect of reducing US companies' performance competitiveness as other jurisdictions seek to capitalise on the situation.  It could also make US companies more likely targets for takeovers.

For further information see:
http://www.ustreas.gov/press/releases/tg119.htm

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