Will multinational corporations survive the coming tax changes?
U.S. corporations already pay high taxes, 35 percent compared to the average tax rate for other industrialized countries of 24.1 percent. In addition, most countries do not tax the foreign profits of domestic corporations. That means that U.S. multinational corporations are already dealing with fierce competitive disadvantages in the global marketplace. Business strategists fear that the President's plan to use these corporations to boost revenue could seriously undercut their ability to compete even further.
As the White House gets ready to unveil its ten-year budget, the administration is faced with April tax revenues that were a full one-third less than those of April 2008, and a federal deficit that may reach $1.94 trillion before year-end. The latest tax proposals are an attempt to extract part of that shortfall from businesses with foreign interests, to the tune of $210 billion over ten years.
The President describes the current tax code as being full of loopholes that favor corporations. At the same time, businesses see those provisions - such as the provision that allows corporations to defer taxes on some income generated abroad - as tools that make it possible for them to survive in the global marketplace.
"When you limit deferral, you limit the ability of U.S. companies to compete, you impede growth in the U.S. economy, and you cause the loss of jobs – both at the companies directly impacted and companies in their supply chains," Marty Regalia, chief economist for the U.S. Chamber of Commerce said in a statement.
"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," added Regalia.
Clint Stretch, managing principal for tax policy at Deloitte Tax LLP has crunched the numbers and he doesn't like what he sees. If all of Obama's proposals* are adopted, they could mean a tax hike of 9 percent for all corporations to 12 percent for corporations with foreign source income. If only the international proposals are adopted, they could mean a 9 percent hike for multinationals.
"It doesn't take some kind of rocket scientist to figure out that really can't be very good for American businesses from a competitiveness point of view," Stretch said.
He added that the White House proposal represents, "a continuing belief that there is a substantial pot of easy money in the international tax rules. It is a pretty old and tired idea."
The Way the White House Sees It
President Obama says that his changes are the fulfillment of a campaign promise. The current tax code gives a competitive advantage to companies that create jobs overseas instead of at home.
According to latest available figures from the Government Accountability Office, 83 of the largest 100 corporations have subsidiaries in tax havens. Collectively they earned about $700 billion in foreign active earnings, and paid 2.3 percent taxes on those earnings. That is a situation the White House seeks to correct.
Here's a breakdown of the President's major tax proposals in this area, and the revenue that is expected if they are adopted:
- $60.1 billion will come from curtailing the ability of U.S. multinationals to defer paying taxes on income generated abroad.
- $43 billion from ending the tax credit U.S. multinationals get for paying the corporate taxes of other nations. Obama said the loopholes "let subsidiaries of some of our largest companies tell the IRS that they are paying taxes abroad, tell foreign governments that they are paying taxes elsewhere, and avoid paying taxes anywhere."
- $95.2 billion from ending the loopholes for the foreign subsidiaries of U.S. corporations and from cracking down on individual taxpayers who hide money in offshore accounts.
Obama plans to announce more changes later which should bring his total projected revenue to $210 billion over ten years.
*Note: Adopting all of the President's proposals includes international changes plus superfund taxes, repeal oil and gas incentives, repeal of LIFO inventory, and codification of economic substance.