Obama targets tax havens, and corporate America shudders
The plan to crack down on individuals who hide cash in foreign accounts has broad support. But eliminating tax havens for American companies could put them at a disadvantage internationally, experts say.
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Obama's proposal would bar firms from taking deductions for their expenses until they pay tax on the offshore profits. The change, which would take effect in 2011, would raise $60 billion in its first eight years, estimates the White House.Skip to next paragraph
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The administration also is proposing to make it more difficult for corporations to shift earnings from one foreign subsidiary to another. It is calling on Congress to pass a package of disclosure and enforcement changes intended to make it more difficult for wealthy individuals to hide their cash overseas.
And the administration's new budget will contain funds to hire 800 new Internal Revenue Service employees dedicated to overseas tax enforcement, announced the president.
Tightening loopholes for individual tax evaders and adding resources for international enforcement would be good moves, according to Rosanne Altshuler, codirector of the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.
"These are changes that should be made," says Ms. Altshuler.
But the situation in regard to the proposed changes for corporations is more complicated, she says.
Most countries tax activities that occur only on their own territory.
If the US curtails the ability of companies to defer their overseas taxes, and leaves in place the current 35 percent tax rate to which income is subject, the result could have unintended consequences.
"More US firms might be acquired by foreign firms. There would be more incentive for start-ups to incorporate outside the US," says Altshuler.
Business groups are already lining up against the Obama proposal. The changes could hit hard some of the largest and most politically powerful companies in the nation, such as Coca-Cola and General Electric.
The companies argue that curtailing their ability to defer tax on foreign profits would give their foreign competitors a built-in financial advantage.
Some powerful members of Congress reacted cooly to Obama's proposals.
"Further study is needed to assess the impact of this plan.... I want to make certain that our tax policies are fair and support the global competitiveness of US businesses," said Sen. Max Baucus (D) of Montana, chairman of the tax-writing Senate Finance Committee.