Big business is pushing back hard on Obama's plan to change rules governing deferral of taxes on overseas profits
It appears that a level playing field depends on where your seats are. The Obama Administration on May 4 fleshed out its proposals for raising approximately $210 billion over 10 years by curbing what it says are corporate loopholes that allow companies investing overseas to gain an unfair advantage over companies that invest in the U.S., largely by deferring taxes on profits earned overseas indefinitely.
Arguing that a "level playing field" is needed, the Obama plan aims to change tax deferral rules for companies that invest overseas and make some other regulatory changes that would cut down on the use of overseas tax havens for businesses and individuals. According to Obama, a January 2009 report by the Government Accountability Office found 83 of the largest 100 U.S. corporations have overseas subsidiaries in tax havens.
Obama said that existing law makes it possible to "pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y."
The business community is already putting up a tough fight. Business Roundtable, an association of CEOs of the largest U.S. corporations, the U.S. Chamber of Commerce, and other business groups have launched a vigorous lobbying effort against the plan, arguing that the $210 billion hit to American businesses would distort the playing field and leave U.S. companies at a disadvantage in the corporate arena compared with other countries' tax regimes.
"My argument is, give me a level playing field, I can play. But if you tilt the field, you're going to throw people out of the game," James W. Owens, chairman and CEO of construction-equipment maker Caterpillar (CAT) and chair of Business Roundtable's International Engagement Initiative, said last month. "Let's don't throw our own multinational companies out of the game."
Vulnerable to Takeovers?
The companies argue that Obama's plan will leave U.S.-based companies vulnerable overseas because foreign rivals won't have to pay the 35% U.S. corporate tax rate—instead paying the tax rates, in effect, overseas, where they are generally considerably lower. Many executives claim it will leave them vulnerable to foreign takeovers and cause even more U.S.-headquartered companies to move abroad.
A key element of the tax proposal is to curtail sharply the ability for corporations to defer U.S. taxes on profits earned overseas until they are brought back to the U.S., while those companies can deduct costs related to the investments immediately. By contrast, U.S. companies must pay taxes on their profits at the same time as they take deductions for supporting investments. Obama also wants to close "loopholes" that allow companies to inflate or accelerate foreign tax credits. The Administration estimates it could raise $103.1 billion from 2011 to 2019 with the changes and proposes to use that revenue to make permanent a tax credit for investing in research and experimentation. Officials estimate that making the research tax credits permanent would cost taxpayers $74.5 billion over the next decade.
Additionally, the Administration says it would raise $95.2 billion over 10 years by cracking down on corporate "tax haven" strategies and the use of overseas accounts by wealthy U.S. citizens. It says it will hire nearly 800 new agents devoted to monitoring international compliance to support the changes.
Obama argues the changes are necessary to support job growth in the U.S. "Our tax code actually provides a competitive advantage to companies that invest and create jobs overseas compared to those that invest and create those same jobs in the U.S.," the White House said in a statement.
"The Wrong Idea"
Corporations, on the other hand, want to frame the discussion as a competitiveness issue. "President Obama's plan today to increase taxes on American corporations is the wrong idea at the wrong time for the wrong reasons," said John J. Castellani, president of Business Roundtable, in a statement issued minutes after the President spoke. "This plan will reduce the ability of U.S. companies to compete in foreign markets, which will not only reduce jobs but will also cripple economic growth here in the United States. It couldn't come at a worse time."
The U.S. Chamber of Commerce was also quick to respond. "Deferral has been mischaracterized as a 'tax break' but is actually a vital mechanism providing relief for American businesses from double taxation," argues Chief Economist Marty Regalia. "The United States is the only major industrialized country which double taxes the overseas earnings of our companies. Since other countries don't subject their companies to double taxation, U.S. companies need deferral to stay competitive in the global marketplace."
Daniel Clifton, a Washington-based policy analyst with Strategas Research Partners, said in a May 4 research note that technology and pharmaceutical firms would be most affected by the proposals. "Make no mistake, this proposal will increase the cost of a U.S. company in the global marketplace and holds significant implications," Clifton writes.
For some more than others. The company in the Standard & Poor's 500-stock index that gets the most revenue from overseas, according to Strategas, is semiconductor maker Nvidia (NVDA), with 91.7%. As a result, the company, which is headquartered in Santa Clara, Calif., pays little in taxes—an average of 2.2% of earnings per year for the past four years, according to a recent BusinessWeek study of the cash taxes companies pay. The company gets tax credits for the costly research it does in the U.S. but then sells most of its products in 17 countries around the globe. Nvidia rival Broadcom (BRCM), based in Irvine, Calif., also does much of its R&D stateside, but manufactures and sells overseas for the most part—often in low-tax jurisdictions. It operated under a tax holiday in Singapore that saved it $284 million in taxes in 2008, and with R&D tax credits the company was able to keep the entire $1.5 billion dividend it brought to the U.S. from overseas earnings in 2008.
Corporate Tax Debate
Owens and other corporate representatives are pushing for any change in deferral to take place within the context of a debate over the corporate tax structure as a whole. They argue that the 35% overall rate—the second-highest statutory rate among developed countries—should be lowered in exchange for trimming back some of the tax breaks that mean few companies pay anywhere near that effective rate.
That may not be as difficult an argument to win as it might appear, given the harsh tone the President took in chastising companies that, he argued, are taking advantage of loopholes to "dodge their responsibilities." Although the Administration would like to move forward quickly on its proposals, Congress may not agree. Anne Mathias, director of research at Concept Capital's Washington Research Group, says many in Congress, and most important, Representative Charles Rangel (D-N.Y.), the powerful head of the tax-writing Ways & Means Committee, don't want to take up the President's proposal in isolation; instead, Rangel wants to address deferral as part of a broader package of corporate tax changes he has been working on for two years.
Mathias says Congress is unlikely to begin moving forward on the deferral issue until late this year, at the earliest. If the economy is still weak, any real decisions could even be delayed until after the 2010 congressional elections. That should give U.S. multinationals and their representatives plenty of time to try to reframe the debate.