Tax News

CCH (cch.taxgroup.com) reports:

  President Obama on May 4 announced a series of proposals designed to curb off-shore tax havens and remove tax incentives, which he said throughout his presidential campaign encourage corporations to shift jobs overseas. In remarks at an international tax forum, Obama said the administration proposals are "a downpayment on the larger tax reform we need to make our tax system simpler and fairer and more efficient for individuals and corporations." The administration plans to announce additional international tax reform measures as part of the more detailed fiscal year budget plan that will be released later in May, according to a White House release.

Overseas Jobs

  The Obama plan would remove tax advantages for investing overseas by reforming deferral rules so that companies cannot claim deductions --with the exception of the research and experimentation (R&E) expenses --on their U.S. tax returns for supporting offshore investments until they pay taxes on offshore profits. The administration would use a portion of the revenue to make permanent the R&E tax credit that is set to expire at the end of 2009.

  The plan also would close foreign tax credit loopholes that currently allow U.S. businesses that pay foreign taxes on overseas profits to claim a credit against their U.S. taxes for the foreign taxes paid. These combined proposals would raise $101.3 billion over ten years, according to the White House document.

Overseas Tax Havens

  A second component of the plan is designed to crack down on overseas tax havens, raising a total of $95.2 billion over ten years. Under the plan, the administration proposes to reform "check-the-box" rules to require certain foreign subsidiaries to be considered as separate corporations for U.S. tax purposes

  The administration plan calls for a comprehensive package of disclosure and enforcement measures to make it more difficult for financial institutions and wealthy individuals to evade taxes. It would require foreign banks doing business with the U.S. to sign an agreement with the IRS to become a qualified intermediary (QI) and share as much information about their U.S. customers as U.S. financial institutions do. Obama also proposes to tighten reporting standards for overseas investments and increase penalties to be imposed on individuals who do not report foreign accounts.

  To provide the IRS with the necessary tools to prosecute international tax-evasion schemes, the plan would double penalties for failure to report overseas investments, extend the statute of limitations for international tax enforcement and increase the reporting requirement on international investors, particularly QIs. The president's fiscal year 2010 budget includes IRS funding to hire 800 new staff specifically for international tax enforcement.

  White House Press Secretary Robert Gibbs said that Obama's proposals are designed to be passed this year and do not necessarily have to be part of the reconciliation process. In response to widespread opposition by corporations and business groups to the deferral provision, Gibbs noted that businesses would benefit from making the R&E tax credit permanent since it would provide some certainty to business investment. He also maintained that the proposal would not put U.S. corporations at a competitive disadvantage or result in job losses in the U.S.

  Many businesses contend that deferrals level the playing field for U.S. companies competing in global markets. One bit of good news for businesses is that the president remains open to lowering corporate tax rates if paid for by loophole closings, Gibbs confirmed.

Senate Reaction

  Senate reaction to Obama's proposals was mixed. Senate Finance Committee Chairman Max Baucus, D-Mont., said more study is required to see how American companies will be influenced by the suggested policies. "I want to make certain that our tax policies are fair and support the global competitiveness of U.S. businesses," he said. Finance Committee ranking member Charles E. Grassley, R-Iowa said the proposals have to be vetted carefully, and Congress needs to look at whether the proposals will cause U.S. workers to lose their jobs and if they will lead U.S. companies to fall behind foreign competition and become more vulnerable to foreign acquisition. "To the extent the president continues on the road of cracking down on tax abuse, he can count on my support," said Grassley. "But, if he's using tax shelters as a stalking horse to raise taxes on corporations at the cost of U.S. jobs, he'll lose me," the senator said.

  Only Senate Budget Committee Chairman Kent Conrad, D-N.D., expressed full support for the president's initiatives. "Far too many big corporations and wealthy individuals have been using offshore tax havens to evade paying taxes that they owe," said Conrad. "This abuse has to stop."

House Reaction

  House Ways and Means Committee ranking member Dave Camp, R-Mich., said Obama's proposal would cause American firms to be taken over by their foreign competitors. Camp said raising taxes on firms like Caterpillar and Cisco during a recession is the wrong action to take. That viewpoint was echoed by National Association of Manufacturers (NAM) President John Engler, who called the Obama plan a disaster. Although Engler said he supports a permanent R&E tax credit, the president's plan will destroy U.S. jobs and undermine the ability of firms to compete overseas.

  Meanwhile, House Majority Leader Steny Hoyer, D-Md., said the proposal would prohibit America's wealthiest taxpayers from avoiding their fair share of taxes. Hoyer said that reducing the use of tax havens and providing additional resources to crack down on abuses of international tax laws will save American taxpayers billions of dollars. House Ways and Means Committee Chairman Charles B. Rangel, D-N.Y., added that he supports Obama's effort to reform international tax laws that allow companies to invest overseas and keep their money abroad through the use of tax havens.

  By Jeff Carlson, Stephen K. Cooper and Paula Cruickshank, CCH News Staff

White House Press Release --Leveling The Playing Field: Curbing Tax Havens and Removing Tax Incentives for Shifting Jobs Overseas

Senate Finance Committee Memorandum: Baucus Statement on President's International Tax Proposals

House Ways and Means Committee Release: Congress Will Work with Obama Administration to Close Loopholes, Strengthen Investment Opportunities and Job Creation in America

White House Press Release --Remarks by the President on International Tax Policy Reform