Bloomberg News

Obama Diverges With Camp Over Taxing Company Profits Overseas

January 31, 2012

Jan. 30 (Bloomberg) -- President Barack Obama is proposing a tax on the overseas profits of U.S. companies, prompting a clash with congressional Republicans who are seeking to reduce the federal government’s take of offshore earnings.

In his Jan. 24 State of the Union address, Obama said U.S. companies should pay a “basic minimum tax” on offshore profits. That is at odds with a proposal that House Ways and Means Committee Chairman Dave Camp offered in October. The Michigan Republican would allow companies to exempt 95 percent of their overseas earnings from taxation in the U.S.

“They’re inconsistent concepts,” said Linda Carlisle, a partner at White & Case LLP in Washington. Obama “does seem to be rejecting” Camp’s approach.

U.S. companies hold more than $1 trillion in profits overseas and the treatment of those earnings would be a central element of a tax code overhaul that Obama and congressional Republicans say they want to pursue. The distance between Obama and Camp reflects philosophical differences over whether companies are shifting cash offshore to put off paying U.S. taxes or to compete more effectively in the global economy.

“No American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas,” Obama said in his State of the Union speech.

Taxing Worldwide Income

The U.S. currently taxes worldwide income at a rate of as much as 35 percent. Most companies pay lower effective rates because the U.S. allows them to claim tax credits for payments to other governments and defer taxation until profits are brought home.

Obama’s fiscal 2013 budget proposal, scheduled to be sent to Congress on Feb. 13, is expected to include provisions raising taxes for high earners and protecting domestic manufacturers. About the same time, the administration plans to release principles for a comprehensive rewrite of U.S. corporate tax laws.

Obama hasn’t specified the minimum rate at which offshore profits would be taxed or explained how it would be applied. Tax experts questioned whether the levy would be charged even if a company reported a loss in the U.S.

Marc Gerson, an attorney at Miller & Chevalier in Washington, said he doesn’t anticipate Obama’s budget plan or the administration’s corporate tax overhaul proposal will contain enough details to answer these types of questions.

‘Isolated Proposal’

“What we’ve seen from the administration is an isolated proposal,” he said. “It is difficult to see how what the administration is putting forward will significantly advance the tax reform debate.”

Republicans say the current system encourages companies to stash profits in other countries, preventing businesses from investing and hiring in the U.S. Companies including Procter & Gamble Co. and General Electric Co. have lobbied for a shift to a territorial system in which the U.S. taxes only domestically generated profits. The U.K. and Japan have similar laws.

Such companies as Google Inc., Apple Inc. and Qualcomm Inc. are part of a coalition that is lobbying for a one-time tax holiday that would allow corporations to return profits to the U.S. at a 5.25 percent rate.

Camp’s proposal is a middle ground of sorts. His proposal would move the U.S. to territorial system by excluding 95 percent of overseas income from the reach of federal tax authorities. He would tax domestic corporate income at 25 percent and finance the lower rate by requiring companies to pay a 5.25 percent tax on accumulated overseas profits over eight years.

Repatriation

Once companies pay that tax, they could repatriate money to the U.S. with the 95 percent exemption.

Kenneth Kies, a lobbyist in Washington whose clients include Microsoft Corp. and Caterpillar Inc., said Obama’s international tax proposal won’t advance in Congress.

“It appears that he’s going in the opposite direction from the prevailing thought in the rest of the world,” Kies said. “If it were enacted, it would just make U.S. multinationals even less competitive.”

John Buckley, a professor at the Georgetown University Law School in Washington and a former chief tax counsel for Democrats on the Ways and Means Committee, said the goal of a tax overhaul is shifting. While Republicans have focused on lowering rates and broadening the tax base, Democrats are tapping into the tension over income inequality and the loss of manufacturing jobs, he said.

“The tax reform debate from the Democratic perspective will focus on equity and the attempt to restore manufacturing jobs,” Buckley said. “The visions are quite different.”

Administration’s Tax Goals

Obama’s economic advisers point out areas of overlap between their tax policy goals and those being advanced by Camp. In a Jan. 25 conference call with reporters, Gene Sperling, the White House’s director of the National Economic Council, noted that Camp’s proposal listed several options for discussion that would limit the erosion of the tax base in a territorial system.

The options include a requirement that companies pay an immediate 15 percent tax on income they receive from intangible assets, such as royalties. Another option would prevent companies from benefitting from the 95 percent exclusion when booking profits in countries with effective tax rates of less than 10 percent.

“That concept of a basic minimum tax that everyone has to pay -- and that if you’re trying to get too low in the tax statement, that you would have to make that difference back to the United States -- is a very solid and important principle,” Sperling said.

Still, Obama’s proposal is another reminder of the divide that must be bridged before a deal can be reached on a tax code rewrite.

“There is a consensus building to lower rates and broaden the base,” said Eric Solomon, the co-director of Ernst & Young LLP’s Americas Tax Center. “Whether there is a consensus on a territorial or worldwide system, I don’t see a consensus yet with regard to that.”

--Editors: Jodi Schneider, Robin Meszoly

-0- Jan/31/2012 19:02 GMT

To contact the reporter on this story: Steven Sloan in Washington at ssloan7@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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