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Obama targets overseas tax loopholes

WASHINGTON — President Barack Obama promised sternly Monday to crack down on companies "that ship jobs overseas" and duck U.S. taxes with offshore havens.

It won't be easy. Democrats have been fighting — and losing — this battle since President John F. Kennedy made a similar proposal in 1961.

Obama's proposal to close tax loopholes was a reliable applause line during the presidential campaign, but it got a lukewarm response Monday from Capitol Hill. Sen. Max Baucus of Montana, the Democratic chairman of the Senate Finance Committee, said the plan needed further study, even though similar ideas have been around for years.

The president's plan would limit the ability of U.S. companies to defer paying U.S. taxes on overseas profits. At the same time, Obama would step up efforts to go after evaders who abuse offshore tax shelters.

Obama said his plan would raise $210 billion over the next 10 years, though no tax increases would go into effect until 2011. That's an average of $21 billion a year, less than a 2 percent nick in a federal budget that is projected to generate a deficit of $1.2 trillion in 2010.

Lost revenue isn't the only problem, Obama says. He contends the current system gives companies an incentive to invest overseas rather than create jobs in the United States.

The business community argues the system helps them compete with foreign companies that pay taxes only in the countries where they generate profits.

Obama also proposed a package of disclosure and enforcement measures designed to make it harder for financial institutions to help wealthy individuals evade taxes in overseas accounts. Obama said the government is hiring nearly 800 new IRS agents to enforce the tax code.

Obama's plan would impose billions of dollars in new taxes on many of the nation's largest corporations, including Google, General Electric, Hewlett-Packard, Intel and Johnson & Johnson, tax experts said.

In exchange for the increased taxes, Obama agreed to make permanent a research tax credit that would provide firms about $75 billion in breaks over the next 10 years. The credit is to expire at the end of the year.

Obama has widespread support in Congress to crack down on tax evaders who illegally hide assets in tax havens. But he faces stiff opposition — even within his own party — to increasing taxes on the legal transactions of U.S. multinational companies.

A coalition of business groups has already stepped up lobbying efforts to kill attempts to increase taxes on overseas profits, saying it would make American companies less competitive.

At issue is the way the United States taxes the overseas profits of U.S. companies. Under current law, American corporations with subsidiaries in foreign countries can defer paying U.S. taxes on the profits of those subsidiaries until the money is transferred back to this country.

If companies leave the money overseas, where corporate tax rates in most countries are lower than in the United States, they can avoid American taxes on those profits indefinitely. Obama's plan would:

• Prevent companies from writing off domestic expenses that help generate profits abroad, until those profits are returned to the United States and subjected to American taxes.

• Prohibit companies from receiving foreign tax credits on income not subject to U.S. taxes.

• End a provision that lets U.S. companies legally shift income from one foreign subsidiary to another, making the taxes they owe to the United States "disappear."

Obama targets overseas tax loopholes 05/04/09 [Last modified: Monday, May 4, 2009 11:14pm]
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