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Many business groups view the Obama proposals as out of kilter with the rest of the world |
President Obama unveiled his FY 2016 Budget plan last month, seeking to replace the existing deferral system for US multinational companies and impose a minimum 19% tax on their foreign earnings, as well as charging a 14% tax on previously untaxed foreign income. Tax directors and their advisers say the proposals will harm economic growth and make US businesses less competitive in the global marketplace. They repeated that only comprehensive reform would fix the problems with the tax code.
"While one can understand the frustration of US tax policymakers in the actions of multinationals, the proper response would be to address the underlying weaknesses in the US tax system," said Tim Wach, global managing director at Taxand.
The president wants to raise $268 billion by levying a one-off 14% transition tax on the cash piles held by US companies overseas (who could then repatriate foreign earnings without paying any more tax), as well as a 19% tax on any future profits.
By seeking to tax foreign profits, this move would go even further than the UK's diverted profits tax (DPT or 'Google tax'), announced by George Osborne, Chancellor of the Exchequer, in his Autumn Statement in December.
The UK DPT was criticised for, among other things, moving unilaterally before the work of OECD's anti-base erosion and profit shifting (BEPS) action plan is completed later this year, and much of the initial reaction to the Obama plan has been similarly negative.
However, Crawford Spence, professor of accounting at Warwick Business School in the UK, said moves such as these from the US and UK governments, rather than undermining the OECD's efforts, are a positive stride towards tax harmonisation.
"Forcing US companies to pay tax on foreign profits goes some way towards international tax harmonisation, reducing the incentives to set up company headquarters and operations in tax havens such as Luxembourg," said Spence. "This could be an important step, not just for the US, but for governments worldwide who have lost track of their own companies' financial affairs."
Aside from such international implications, Obama has domestic motivations, with a $478 billion national infrastructure project to pay for. The revenue raised by the Administration's new levies would part-fund the US Government's six year programme to rebuild highways and bridges.
"Not for the first time, tax repatriation is being used as a means to fund government initiatives and fill a portion of the budgetary deficit," said Wach.
Rather than encouraging US companies to repatriate profits or return operations to the US by delivering a corporate tax cut, Obama has chosen to levy new taxes, an approach which is at odds with the tax competition governments elsewhere around the world are engaging in as a method of maintaining and attracting investment.
Wach said the transition tax will "exacerbate the uncompetitive nature of the US tax system" and calls for a broader discussion of US tax reform, praising figures such as Herman Cain, former Republican presidential candidate, for bringing concepts including a US VAT to the table back in 2012.
The PACE Coalition [Promote America's Competitive Edge] also views the Obama proposals as out of kilter with the rest of the world.
"While the rest of the developed world has adopted tax systems that allow their businesses to grow at home while expanding globally, the Administration's proposed minimum tax on foreign business income – which exists in no other advanced economy – would make US businesses even less competitive in foreign markets."
The coalition describes the proposal to levy a new $270 billion tax on existing foreign operations as "both misguided and punitive".
The Business Roundtable (BRT) group of American chief executive officers, was also quick to outline the negative consequences of the Budget for US multinational businesses.
"Unfortunately, the Administration has proposed steep tax increases on businesses that will negatively impact their competitiveness – especially those businesses that compete in the global marketplace," said BRT president John Engler.
However, Spence praised the additional consistency the latest proposals would bring to the US tax code. He said they would go some way to resolving the "contradiction" of the US levying income tax on its citizens abroad but, until now, not extending this policy to corporations (in the absence of profit repatriation), though "corporations in the US are essentially treated as legal 'persons', with all the rights of individuals but not so many of the obligations".
The Budget proposals are also likely to ensure the spotlight remains focused on concepts of tax morality and corporate social responsibility. The fact Obama is linking the new tax proposal to a public infrastructure campaign, Spence said, will reinforce the public's linking of corporate tax avoidance and public welfare.
However, Wach dismissed the political rhetoric of Obama and others on Capitol Hill.
"The primary reason for multinationals choosing to defer repatriation of foreign-sourced profits is not because of their "unpatriotic" nature, as deemed by Obama, but because their profits will be slapped with a corporate tax rate of up to 35% if they were to bring these funds back home," he said.
The likelihood of the plan getting the approval of a Republican-controlled Congress is slim, though some from that party, such as Charles Boustany of Louisiana, a member of the Ways and Means Committee, the tax-writing body in the House of Representatives, seemed to suggest last month that it was.
