President Barack Obama and Treasury Secretary Timothy Geithner outlined a series of moves aimed at closing corporate tax loopholes that encourage U.S. companies to shift income and jobs to other countries.

The Treasury pointed out in announcing the initiative that in 2004, the most recent year for which data is available, U.S. multinational corporations paid about $16 billion of U.S. tax on approximately $700 billion of foreign active earnings – an effective U.S. tax rate of about 2.3 percent. In addition, a January 2009 report by the Government Accountability Office found that of the 100 largest U.S. corporations, 83 have subsidiaries in tax havens.

"It's a Tax Code that says you should pay lower taxes if you createa job in Bangalore, India, than if you create one in Buffalo, N.Y.,"said Obama.

Obama and Geithner said the reforms would raise $210 billion over the next 10 years.

The reforms build on proposals by Senate Finance Committee Chairman Max Baucus, D-Mont., and House Ways and Means Chairman Charles Rangel, D-N.Y., as well as Sen. Carl Levin, D-Mich., and Rep. Lloyd Doggett, D-Texas.

Under one set of proposals, the administration hopes to raise $103.1 billion by removing the tax advantages for creating jobs and investing in business expansion overseas, including by reforming tax deferral rules. Currently, businesses that invest overseas can take immediate deductions on their U.S. tax returns for expenses supporting their overseas investments but nevertheless “defer” paying U.S. taxes on the profits they make from those investments, the Treasury pointed out.

The Obama administration would reform the rules surrounding deferral so that – with the exception of research and experimentation expenses – companies could not receive deductions on their U.S. tax returns supporting their offshore investments until they pay taxes on their offshore profits. This provision would take effect in 2011, raising $60.1 billion from 2011 to 2019. Among the large companies using tax deferral rules are GE, HP, AIG, Amgen and Microsoft.

The administration also wants to close loopholes in the foreign tax credit. Current law allows U.S. businesses that pay foreign taxes on overseas profits to claim a credit against their U.S. taxes for the foreign taxes paid, but some U.S. businesses use loopholes to artificially inflate or accelerate these credits. The administration would close these loopholes, raising an estimated $43.0 billion from 2011 to 2019.

Obama hopes to use the savings from ending the overseas tax breaks to permanently extend the Research and Experimentation Tax Credit, which provides an incentive for businesses to invest in innovation in the U.S. and is currently set to expire at the end of 2009. The administration proposes making the R&E tax credit permanent, providing a tax cut of $74.5 billion over 10 years to businesses that invest in the U.S.

In addition, Obama plans to raise $95.2 billion over the next 10 years by cracking down on overseas tax havens such as the Cayman Islands and Bermuda. The administration proposes to eliminate loopholes for what it calls “disappearing” offshore subsidiaries.

Traditionally, U.S. companies have been required to report certain income shifted from one foreign subsidiary to another as passive income subject to U.S. taxes. But over the past decade, so-called “check-the-box” rules have allowed companies to make their foreign subsidiaries “disappear” for tax purposes – permitting them to legally shift income to tax havens and make the taxes they owe the U.S. disappear as well.

The Obama administration proposes to reform these rules to require certain foreign subsidiaries to be considered as separate corporations for U.S. tax purposes. This provision would take effect in 2011, raising $86.5 billion from 2011 to 2019.

The proposal is likely to cause protest among companies and accountants that have put a great deal of effort into designing corporate structures for tax purposes. “You can design a structure that’s rock solid from a tax perspective, but if it doesn’t make money, you can be out of business in three months,” said KPMG partner Stephen Bates at a recent forum on tax efficiencies in the global supply chain at New York University’s School of Law.

Business groups are also lining up against Obama's proposals to change the tax deferral rules. “The proposed changes on deferral will limit the ability of U.S. financial services firms to compete in a global economy,” said Financial Services Roundtable president and CEO Steve Bartlett. “They strike at the heart of the industry’s ability to produce for all customers, both in America and abroad.”

In addition, Obama is continuing the administration’s efforts to crack down on the abuse of tax havens by individuals, most noticeably in its pursuit of information from UBS on U.S. citizens who hold secret numbered Swiss bank accounts.

In addition to initiatives taken within the G-20 to impose sanctions on countries judged by their peers not to be adequately implementing information exchange standards, the Obama administration is proposing a package of disclosure and enforcement measures to make it more difficult for financial institutions and wealthy individuals to evade taxes. The administration estimates this package would raise at least $8.7 billion over 10 years by withholding taxes from accounts at institutions that don’t share information with the U.S.

The proposal requires foreign financial institutions that have dealings with the U.S. to sign an agreement with the IRS to become a “qualified intermediary” and share as much information about their U.S. customers as U.S. financial institutions do, or else face the presumption that they may be facilitating tax evasion and have taxes withheld on payments to their customers. In addition, the proposal would shut down loopholes that allow QIs to claim they are complying with the law even as they help wealthy U.S. citizens avoid paying taxes.

The administration also wants to shift the burden of proof and increase penalties for well-off individuals who seek to abuse tax havens. The administration proposes tightening the reporting standards for overseas investments, increasing penalties and imposing negative presumptions on individuals who fail to report foreign accounts, and extending the statute of limitations for enforcement. Moreover, Obama plans to hire nearly 800 new Internal Revenue Service employees devoted to international enforcement, increasing the IRS’s ability to crack down on offshore tax avoidance. 

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