On May 4, 2009, President Barack Obama and Treasury Secretary Tim Geithner unveiled several major international tax proposals that are intended to correct so-called "loopholes" in current tax law. On May 11, 2009, the Administration issued the Treasury Greenbook, which provided a more detailed description of the tax proposals. The Administration asserts that its international tax proposals will crack down on overseas tax havens and replace perceived tax incentives for creating jobs overseas with incentives to create them at home. One of President Obama's key proposals would place (new) significant limits on deferral which is an important feature of the U.S. taxation of international income in the U.S. Tax Code.
Many of the President's budget proposals would affect both private and publicly held companies and would create hundreds of billions of dollars in tax increases on U.S. businesses. Changing the current deferral policy for U.S.-based companies would fundamentally change global companies and how they can compete abroad. FEI's Committee on Taxation (COT) encourages all financial executives to initiate or maintain a dialogue on the critical issues with their elected representatives.
FEI COMMENT: The Committee on Taxation (COT) of Financial Executives International (FEI) has released a statement in response to President Obama's plan to raise taxes on U.S. based companies doing business overseas.
"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 competitiveness. 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.
"We encourage Congress to avoid taking any steps that would hurt the ability of U.S. companies to compete globally, and strongly recommend that any major tax policy changes be addressed in the context of a broader tax reform effort, in which a significant corporate tax rate reduction is considered concurrently. We would welcome a dialogue with the current Administration or Congressional leaders to discuss ideas for tax reform that will benefit all companies and the U.S. economy."
BACKGROUND: Operating in an increasingly interconnected global economy, most U.S. companies take a two-pronged approach to stay competitive and continue growing. First, they spend to develop new products and to keep their old products on the cutting edge. Second, they expand their businesses overseas and introduce their products in new markets. Penetration of overseas markets is a necessary element of maintaining growth, because 95 percent of the world's consumers are located outside the U.S.
Growth overseas does not occur to the detriment of domestic business; in fact, successful growth overseas supports continued domestic growth in jobs and wages. The foreign operations of U.S. companies stimulate sales of products and services at home (e.g., from U.S. suppliers), drive U.S. exports, and expand the need for U.S. research and headquarters operations.
The U.S. has the second highest tax rate among industrialized countries. Moreover, the U.S. is virtually the only developed country that has a worldwide – as opposed to territorial – tax system. (In other words, U.S.-based companies pay U.S. taxes on both domestic income and foreign income.) The high U.S. tax rate, combined with the system of worldwide taxation, places U.S. multinationals at a competitive disadvantage to foreign–based multinationals and smaller foreign-based competitors.
Current law permits deferral of U.S. taxation with respect to foreign earnings generated in foreign subsidiaries of U.S. parents and serves to level this uneven playing field somewhat. In effect, deferral permits both U.S.-owned and foreign-owned companies to pay the same tax rate on their overseas operations. While the Administration's proposal does not repeal deferral outright, it will have the effect of substantially eliminating the benefit of deferral and, as such, will undermine the leveling of the playing field that the current deferral regime produces.
ADDITIONAL RESOURCES: FEI's Committee on Taxation (COT) is a member of the Pace (Promote America's Competitive Edge) Coalition. This Coalition is dedicated to promoting and increasing the more than 50 million American jobs that depend on the international competitiveness of U.S.-based multinational companies. Visit the Coalition's Web site for information on the deferral policy.
FEI COT January 2009 letter to Congress on the Economic Stimulus plan encouraged the inclusion of important tax relief for businesses in future legislation packages developed by the current administration.
FEI COT March 2009 Letter to Congressional leadership on Budget.
White House Fact Sheet, "Leveling the Playing Field: Curbing Tax Havens and Removing Tax Incentives for Shifting Jobs Overseas."