International Taxation: Can Bad Get Worse?

The Obama administrationís new proposals would greatly alter international tax rules as they apply to U.S.-based organizations, which already pay one of the highest corporate tax rates in the world.

July 30, 2009
Sponsored by Vertex, Inc.
by Glenn A. Cheney, Financial Executives Magazine

FEI’s Committee on Taxation is advocating — along with other business groups — for a fair and balanced tax code that would strengthen U.S. economic growth, increase job opportunities and improve the competitiveness of U.S.-based companies.

When the United States Treasury Secretary Timothy Geithner announced the Obama administration’s new tax proposals in May, corporate America cringed. As if the nation’s businesses hadn’t enough problems, the federal government was proposing new policies that would — in many cases — increase their taxes, weaken their competitive edge and add a new layer of complexity to calculations that were already excruciatingly complex.

Several of the most critiqued proposals would significantly alter the U.S. tax rules that relate to foreign-source income. Specifically, President Barack Obama’s proposal would place significant limits on deferral.

Current law allows companies to take immediate deductions for investments in foreign operations while deferring payment of taxes on the consequent profits until those funds are “repatriated” to the U.S.

The administration’s proposal — which the president says aims to increase tax revenues by $281 billion over the next 10 years — would revise the rule ton deductions by U.S. companies to the extent they are allocable to unrepatriated foreign earnings.

“It’s a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y.,” Obama said when he announced his proposed alternative.

Under Obama’s proposal, the deductions for investment would be deferred as long as the taxes are. No repatriation, no deduction. The only exception would be for investments in research and experimentation.

The proposal would also correct what the administration refers to as “foreign tax-credit loopholes” in the current law by ending certain foreign tax credits. Current rules allow American companies that pay foreign taxes to claim a credit against their U.S. taxes, and the administration writes, “Some U.S. businesses use loopholes to artificially inflate or accelerate these credits.” By closing those so-called loopholes, the administration hopes to reap some $43 billion between 2011 and 2019.

The proposal moves to fulfill Obama’s campaign promise to eliminate a tax that is widely perceived — and many would say misperceived — as rewarding the exportation of jobs. If companies couldn’t deduct their investments until they paid taxes on their profits, the argument goes, they’d be more likely to keep their operations — and jobs — in the U.S.

On the surface, the argument has an air or fairness. A company that keeps all its operations in the U.S. has to pay the full 35 percent federal tax on its profits, and quite likely a state tax, too. A company that moves its operations overseas may pay a small fraction of that percentage, as long as it keeps reinvesting its profits offshore.

“These aren’t loopholes,” argued U.S. Chamber of Commerce Chief Economist Martin Regalia, in an article posted on May 4 on Cnn-Money.com [referring to the administration’s proposals]. “This is only about raising more money — it’s not about making the tax code simpler or more efficient or easier or anything else.”

Then, on May 21, Financial Executives International’s Committee on Taxation sent a statement to Congress urging its members to “help U.S. businesses stay competitive.”

“FEI’s Committee on Taxation strongly believes that President Obama’s tax proposals, as currently outlined in the context of high U.S. corporate tax rates, would be detrimental to U.S. companies’ global competiveness.

“It is clear that U.S. companies grow domestically and U.S. jobs and wages increase when U.S. companies succeed internationally.

“U.S. companies need a level playing field to succeed in international markets, and from the standpoint of multinational corporations, a fair and balanced tax code must strengthen U.S. economic growth, increase U.S. job opportunities and improve the competitiveness of U.S.-based companies in both U.S. and international markets.

“This committee of financial executives cannot support policies, such as deferral ‘reform’ that would make American companies less competitive in the world.”

To read the full article, please visit: International Taxation: Can Bad Get Worse? (PDF).

Glenn A. Cheney is a Hanover, Conn., freelance writer who focuses on subjects pertaining to finance, business, accounting and financial reporting.

* This excerpt is copyrighted 2009 Financial Executives International and has been reprinted with expressed/written consent.