Firms Face Tighter Tax Rules
Obama Plan Aims to Limit Use of Offshore Havens by Multinationals and the Wealthy
By JOHN D. MCKINNON and JESSE DRUCKER
WASHINGTON -- The Obama administration is rolling out details Monday of what aides are calling a far-reaching crackdown on offshore tax avoidance, targeting many U.S.-based multinational corporations and wealthy individuals.
President Barack Obama is fleshing out a proposal included in his February budget blueprint seeking to curb the practice of parking foreign earnings in offshore tax havens indefinitely. By some estimates, $700 billion or more in U.S. corporate earnings have accumulated in overseas accounts in recent years.
The plan being announced Monday will go further. It aims to change the legal treatment of offshore subsidiaries and structures that companies have used to avoid not only U.S. taxes, but taxes in other developed countries as well.
In addition, the administration will strive to tighten rules that have encouraged thousands of Americans to open offshore bank accounts in an effort to duck U.S. taxes. The plan would increase information reporting and tax withholding as well as penalties, and make it harder for foreign account-holders to win cases in court. The administration promised new enforcement tools to crack down on tax-haven abuse.
"What we really have is a system that is in many ways broken," a senior administration official said Sunday, one that "allows people to play games...to almost completely avoid paying taxes on active foreign earnings."
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The sweep of the administration's plan took some tax experts by surprise, and foreshadows potential fights with big businesses later this year over some of their most cherished breaks, particularly as Congress looks for revenue to pay for new initiatives.
"There absolutely will be" opposition from business, particularly if the administration doesn't allow a suitable adjustment period, said Phil West, a lawyer with Steptoe & Johnson LLP, who was international tax counsel for the Treasury Department under President Bill Clinton.
The president's announcement comes as he prepares to release a more detailed budget blueprint later this week. And the high-level attacks on big business follow a series of White House broadsides on corporate practices. Mr. Obama riled Wall Street last week by crafting a bankruptcy deal for Chrysler LLC that favored the United Auto Workers union over a series of lenders.
White House officials said the latest proposals simply follow through on Mr. Obama's frequent criticism that current U.S. tax rules encourage multinationals to move jobs overseas. The new tax plan also aims to increase incentives for job creation in the U.S., they said, noting that some of the money raised would be used to cover the cost of extending a soon-to-expire federal tax credit for research costs.
Many of Mr. Obama's proposals will require congressional approval. And while Democrats control both houses of Congress, many members of his own party have expressed reluctance about raising taxes, so prospects for the proposals are uncertain, even though none would take effect until 2011.
A senior Republican aide termed the proposals a "revenue grab," predicting they could end up driving more corporate operations overseas. Some or all of the changes could become fodder for broader tax reform next year.
"If rules are changed on tax deferral and we are taxed in the U.S. on non-U.S. profit, this significant additional U.S. tax cost would adversely impact our ability to invest and grow our business in the U.S....and to compete against our foreign competitors who are not subject to this U.S. tax," said John Earnhardt, a Cisco Systems Inc. spokesman.
The president's tax announcement, which was made with Treasury Secretary Timothy Geithner Monday, is part of an administration plan to raise as much as $210 billion in extra tax revenue over the next decade, in an effort to trim budget deficits and pay for job-creation incentives and other programs.
The plan takes aim at a range of financial practices that have combined to erode the U.S. tax base in recent decades. As money has become more readily transferable -- and aggressive tax planning more widespread -- it has become easier for companies and individuals to take advantage of low taxes as well as lack of transparency in many offshore havens.
In one big change, the administration is aiming to curb a practice commonly known as "deferral," which U.S. multinationals use to shave their tax bills on their overseas operations.
Under current law, U.S. companies can defer taxes indefinitely on the many of the profits they say they have earned overseas until they "repatriate" that money back to the U.S. The administration seeks to sharply limit the tax deductions that companies taking advantage of deferral can take.
Still, the proposal is far less dramatic than what many companies had feared: a complete repeal of the deferral regime.
The proposal also would clamp down on some other overseas tax-avoidance techniques that are widely used by U.S. multinationals.
The Obama administration wants to overhaul what it describes as a much-abused set of regulations known as the "check-the-box" rules. These give companies great latitude in deciding where exactly their subsidiaries should be taxed. Those rules have encouraged companies to take further advantage of low-tax haven countries with their offshore subsidiaries.
The administration also wants to toughen rules governing the tax credits that the U.S. grants companies to offset taxes they pay to foreign governments. That system has become the subject of elaborate gaming, U.S. tax officials say.
Overall, the deferral proposal would raise about $60.1 billion through 2019, according to the administration's estimates. Unlike a similar proposal in the House, it wouldn't affect research deductions, a likely victory for some industries such as pharmaceuticals. The reform of check-the-box rules would raise about $86.5 billion through the same period. The changes in foreign-tax-credit rules would raise about $43 billion. The changes to crack down on individual bank accounts would raise $9 billion.
The current U.S. rules for corporations carry enormous benefits for companies. Unlike most deferred taxes, those stemming from foreign earnings don't cut into a company's bottom line as long as they are considered "permanently reinvested" overseas.
The result can have a huge impact on a company's bottom line. The pharmaceutical and technology industries are particular beneficiaries.