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Obama Crackdown on Foreign Taxes May Not Work

February 23, 2012

The Obama administration’s newly released proposals for business tax reform might not achieve his goals of compelling more U.S. multinational corporations to shift their investments and jobs back home, according to one tax expert.

“I don’t know if imposing some sort of minimum tax on foreign earnings of companies would really achieve what he’s trying to do,” said  Steve Henley, national tax practice leader at CBIZ MHM. “It seems to me that you’re still going to have a lot of complexity with companies trying to shift profits abroad.”

The proposed reforms unveiled Wednesday by Treasury Secretary Tim Geithner would, among other things, require companies to pay a minimum tax on overseas profits (see Obama Proposes Business Tax Reforms). Foreign income deferred in a low-tax jurisdiction would be subject to immediate U.S. taxation up to the minimum tax rate, with a foreign tax credit allowed for income taxes on that income paid to the host country. “The minimum tax would be designed to balance the need to stop rewarding tax havens and to prevent a race to the bottom with the goal of keeping U.S. companies on a level playing field with competitors when engaged in activities which, by necessity, must occur in a foreign country,” said the administration.

Steve Henley

However, Henley noted that the proposal still seemed vague. “I understand what he’s doing in terms of trying to encourage domestic investment and keeping the jobs here, but I guess we’ll just have to see more details about the minimum tax and how it works,” he noted.

“Even though they would have to pay a minimum tax, however it works, it seems like they would still benefit from shifting to lower-tax jurisdictions or might benefit from tax holidays negotiated with a foreign country. Or they might still benefit from transfer pricing strategies that lower their U.S. tax and shift profits abroad, even though you have this minimum tax imposition that you have to deal with. I just think that would add a lot of complexity without a lot of gain.”

Henley acknowledged that there were positive elements of the proposal. “Making the R&D credit permanent is probably a really good thing,” he said. “Having all these extenders that keep expiring and then Congress having to come in and extend them again is not good tax policy, so I’m glad to see that.”

He also likes the small business elements of the tax proposals such as preserving depreciation benefits. “I think that would spur small business investment and would be a good proposal,” he said.

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