Some of the president’s staunchest supporters in Congress and the tech business seemed taken aback by his plans to crack down on offshore corporate tax havens, but they shouldn’t have been surprised.

After all, last year on the campaign trail, Obama said repeatedly that he would end the corporate tax breaks that encourage companies to ship jobs overseas. Standing alongside Treasury Secretary Timothy Geithner and IRS Commissioner Douglas Shulman, he laid out his plans Monday to end some of the popular tax loopholes employed by multinational corporations. Those include tactics such as tax deferrals on foreign income, and so-called “check-the-box” rules that allow companies to act like magicians and have their foreign subsidiaries appear and disappear at will in places like the Cayman Islands (see Obama Seeks to Close Multinational Tax Loopholes).

“One of the strengths of our economy is the global reach of our businesses, and I want to see our companies remain the most competitive in the world,” said Obama. “But the way to make sure that happens is not to reward our companies for moving jobs off our shores or transferring profits to overseas tax havens.” Obama estimated his proposal would generate about $210 billion over the next 10 years for the Treasury.

His words may have sounded good, but his proposals didn’t sit well even with some of his key allies in Congress. Senate Finance Committee Chairman Max Baucus, D-Mont., issued a cautious statement, saying, “Further study is needed to assess the impact of this plan on U.S. businesses.”

Rep. Joseph Crowley, D-N.Y., who represents a district that includes Citigroup’s offices, emphasized, “Any tax reform must protect U.S. multinational companies, including Citibank, which is the largest private sector employer in Queens, so they are not subject to double taxation overseas – which puts them at a competitive disadvantage against their foreign rivals.”

Even one of Obama’s most visible corporate spokespeople during the campaign, Google CEO Eric Schmidt, was mum on the proposals. Google stands to lose over $1 billion a year if the proposals go into law. Other tech companies such as Microsoft, HP, Cisco Systems and IBM also could be whopped with extra billions in tax bills. They would benefit from Obama’s proposal to make the research and experimentation tax credit permanent, but that’s a credit many tech companies expect to get extended every year anyway. The Associated Press pointed out that Google would have been socked last year with an effective tax rate of 45.2 percent, as opposed to 27.8 percent, citing the search king’s annual report, if the other proposals had been in effect.


Schmidt was just named a week ago to a seat on the President’s Council of Advisors on Science and Technology. Presumably that panel doesn’t provide much tax advice.

Even though Obama was joined at the announcement by the IRS commish, the agency actually works with major accounting firms in giving them guidance on how to structure their clients’ overseas businesses so they stay within the law. At a recent New York University/KPMG forum on achieving tax efficiencies in the global supply chain, Michael DiFronzo, a deputy associate chief counsel at the IRS, appeared on a panel with KPMG partner Stephen Bates, whose clients have included HP and Microsoft. “It’s clear that the IRS is not fond of the low-tax shell companies,” said DiFronzo. “We are looking for risk, we are looking for substance.”

They talked about a case study involving a theoretical company that sets up an entity in Switzerland to centralize supply chain risks, but Bates pointed out that some CFOs would want to know first how many employees would need to move to Switzerland to make the structure work, and that would be a problem. “Without CFO-level buy-in, without real supply chain initiatives going on within the company that we can leverage off of, the tax tail can’t wag the dog,” he said.

Accountants have worked tirelessly on devising transfer pricing strategies and studying the intricacies of Subpart F of the Tax Code. Obama may well put the kibosh on some of those strategies if his tax proposals win the day and overcome legislative and lobbyist resistance. But even if they do make their way into law, expect the big firms to push the IRS for guidance on how to comply with, and get around, whatever rules are put in place.
After all, nobody likes to pay taxes, least of all the biggest companies.

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