Obama Budget Raises $276 Billion From U.S. Multinationals

Photographer: Andrew Harrer/Bloomberg

In the fiscal 2015 budget proposed yesterday, the Obama administration seeks to generate $276 billion over the next decade from what it calls loophole-closing in the international tax system. Close

In the fiscal 2015 budget proposed yesterday, the Obama administration seeks to... Read More

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Photographer: Andrew Harrer/Bloomberg

In the fiscal 2015 budget proposed yesterday, the Obama administration seeks to generate $276 billion over the next decade from what it calls loophole-closing in the international tax system.

President Barack Obama is proposing more tax increases for U.S. multinational corporations, seeking ways to prevent them from avoiding taxes by exploiting gaps in international law.

In the fiscal 2015 budget proposed yesterday, the Obama administration seeks to generate $276 billion over the next decade from what it calls loophole-closing in the international tax system. The revenue -- 75 percent more than was sought through such changes in last year’s budget plan -- would be used to reduce corporate tax rates.

Among those affected by the revisions would be pharmaceutical companies looking to relocate to Ireland, technology companies selling cloud-based services outside the U.S., and non-U.S.-based companies borrowing money in the country.

The Obama plan isn’t likely to move forward in a divided Congress that can’t agree on the broad outlines of tax policy, let alone the details. The proposals instead set down a marker in the corporate tax debate, said Manal Corwin, national leader of the international tax practice at KPMG LLP in Washington.

“I don’t know that anybody’s predicting that we’re suddenly going to see tax reform happen,” said Corwin, formerly a Treasury international tax official in the Obama administration. “There are certain themes that seem to be repeating themselves.”

Obama, congressional Republicans and many U.S. multinational companies support reducing the corporate tax rate of 35 percent, which is the highest in the industrialized world.

Rate Cut

They disagree on how to finance such a cut and whether to pair corporate tax changes with higher taxes for individuals. They also differ on the details of potential changes to the international tax system.

Under current law, U.S.-based companies face the full 35 percent tax on income they earn around the world. They receive tax credits for payments to foreign governments and don’t owe the residual U.S. tax until they repatriate the money.

As other countries have reduced their tax rates, U.S. companies have stockpiled about $2 trillion in untaxed offshore profits. They’ve also become creative in using cross-border transactions that locate profits in low-tax jurisdictions.

Obama’s proposals would make it harder for companies to move profits offshore and defer U.S. taxes.

The administration’s emphasis on curbing international tax maneuvers shows that officials are properly concerned that corporations are gaming the U.S. tax system, said Ed Kleinbard, a tax law professor at the University of Southern California.

‘Subsidizing’ Companies

“Current law is subsidizing General Electric (GE) and every other U.S. multinational with a single-digit effective tax rate,” said Kleinbard, who was chief of staff of the nonpartisan congressional Joint Committee on Taxation.

General Electric Co. had a 4.2 percent effective tax rate in 2013, according to securities filings. Jeffrey Bornstein, GE’s chief financial officer, told analysts in January that the “tax efficient sale” of an asset in Switzerland lowered the company’s rate.

Seth Martin, a GE spokesman, said in e-mail that the company would support a revamped tax system with fewer “loopholes” and a “competitive” international system, even if it meant higher taxes for companies like GE.

“The fact is that a majority of our business is outside the U.S., where tax rates are lower,” he said.

Camp’s Plan

Obama’s approach contrasts with the proposal released last week by Representative Dave Camp, a Michigan Republican and chairman of the House Ways and Means Committee.

Camp’s plan also curbs tax maneuvers that erode the U.S. tax base. Unlike in Obama’s budget, the proceeds would finance a permanent system of lighter taxation of foreign profits that Camp says would help U.S. companies compete in overseas markets, because most income wouldn’t be subject to U.S. taxes.

Camp’s international tax proposal would raise $68.3 billion over the next decade, according to the Joint Committee on Taxation. Excluding a one-time $170.4 billion tax on accumulated untaxed profits, the plan would provide an ongoing tax cut for foreign income.

Obama’s budget plan adds items to a list of international tax changes he offered in past years.

Business groups including the U.S. Chamber of Commerce and the Business Roundtable panned the proposed changes.

‘Wrong Direction’

“The president’s international tax proposals would move the U.S. economy in the wrong direction, placing U.S. companies in a worse competitive position than they face today,” John Engler, president of the Business Roundtable, said in a statement yesterday. “Further, we believe that any corporate revenue generated by tax reform base-broadening should be dedicated to creating a more modern and competitive tax system - - not used on unrelated spending.”

Obama’s proposed change on digital goods would require companies to pay the U.S. tax immediately on income they earn from leasing or selling digital items or providing cloud-based digital services. Currently, companies can book those profits in low-tax jurisdictions and owe no U.S. tax until they bring the money home.

Some European countries have been trying to tax income from digital transactions, an issue that’s being debated at the Organization for Economic Cooperation and Development. Yesterday’s plan amounts to a claim that the income should be taxed by the U.S., Corwin said.

Actavis, Eaton

The proposed change on expatriation is designed to limit transactions like the ones that U.S.-based companies such as Actavis Plc (ACT) and Eaton Plc have used to move outside the country.

With the change, the U.S. would continue to treat companies as domestic for tax purposes if they have substantial business activities in the country and are managed and controlled in the U.S.

Mid-sized pharmaceutical companies are under pressure to reduce their tax rates, raising the possibility of similar transactions involving companies such as Mylan Inc. and Allergan Inc., said Liav Abraham, a pharmaceutical industry analyst at Citigroup Inc., who said the administration proposal wouldn’t take effect until 2015.

“There’s still a window of time and this is certainly a focus over the next 10 months for the industry,” Abraham said.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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