Obama Wants New Law To Tax Overseas Profits And Nail Tax Dodgers

U.S. President Barack Obama Yesterday (Monday) announced a proposal for new legislation to pursue American tax evaders by closing loopholes and clamping down on overseas tax breaks for American businesses and individuals.

Under provisions of the plan, companies would no longer be able to write off domestic expenses for generating profits abroad, a loophole that Obama says encourages U.S. companies to move jobs overseas. The plan would drastically reduce incentives for U.S. companies to base all or part of their operations in other countries.

Additionally, Obama is pushing for a $60.1 billion plan to restrict deductions for American companies that defer taxes on foreign profits and a $43 billion crackdown on abusive foreign tax credits. Combined, these measures would amount to the biggest tax increase on U.S. corporations since 1986, according to Bloomberg News.

Companies with significant overseas operations could lose billions if the president’s plan passes. Under existing laws, companies are taxed only on profits they bring home.  By stashing the profits in international subsidiaries they can defer paying taxes indefinitely.

While it debates the bill, Congress will remain under pressure from a significant lobbying campaign to scuttle significant portions of Obama’s plan.

Over 200 firms, including Pfizer Inc. (PFE), Oracle Corp. (ORCL), Microsoft Corp. (MSFT), Johnson & Johnson (JNJ) and General Electric Co. (GE) signed a letter to congressional leaders in March opposing changes to the “deferral” provision.

The letter, also signed by the U.S. 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 units.

“This is bad stuff,” Kenneth Kies, a tax lobbyist at the Washington firm Federal Policy Group, told Bloomberg. “This is going to be the biggest fight for the corporate community in the next two years.”

The biggest squabble is likely to be over the repeal of so-called “check-the-box” rules, which took effect in 1997. They were designed to reduce paperwork by allowing companies to classify units within their corporate umbrella in the most tax-efficient manner without generating a tax challenge from the IRS.

The rules make it easy for multinationals to shift profits to entities in low-tax countries.   Once the assets are transferred, the parent company borrows from the subsidiary, making the interest payments deductible in the U.S. and tax-free in the haven. More than 80% of the nation’s 100 biggest companies have subsidiaries in tax havens, according to a Government Accountability Office report.

The rules were intended to help U.S. companies minimize their foreign tax liability, not to dodge the Internal Revenue Service (IRS), according to Drew Lyon, a former Treasury Department tax official who is now a principal at PricewaterhouseCoopers LLP’s Washington office.

The changes to the “deferral” provision would hit some of the nation’s biggest companies hard since half of multinationals firms’ income is earned abroad, Lyon told Reuters.

Another part of the package would shift the burden of proof to individuals when the IRS alleges assets are being hidden in bank accounts in offshore tax havens like the Cayman Islands and Switzerland.

The U.S. government has essentially declared war on U.S. citizens who make use of offshore accounts to stash money in overseas accounts and avoid taxation.

Swiss banking giant UBS AG (UBS) agreed in February to pay a $780 million fine and identified about 320 of its American clients as it acknowledged that it helped U.S. customers hide assets from their government.

The U.S. is now suing UBS in a civil case to force it to divulge the identities of 52,000 Americans with accounts at the bank that it suspects are hiding about $14.8 billion in assets.

Obama also announced plans to hire nearly 800 new IRS agents to bolster enforcement of overseas tax evasion and wants to see stiffer penalties for those who fail to meet reporting requirements.

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