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News : International Last Updated: May 6, 2009 - 8:38:21 AM


Obama outlines tax crackdown on US multinationals to raise $210 billion over decade; Ireland, Bermuda, Netherlands identified as corporate tax havens
By Finfacts Team
May 5, 2009 - 3:32:07 AM

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President Barack Obama speaking in the White House on international tax reform on Monday, May 04, 2009

President Barack Obama on Monday outlined a crackdown on US multinationals overseas tax shelters to raise $210 billion over a decade. Supporting documentation from the US Treasury, identified  Ireland, Bermuda and the Netherlands identified as corporate tax havens.

The Wall Street Journal reported last month that just ten of the largest US companies sheltered nearly $58 billion in earnings overseas during 2008, representing about $20 billion in potential tax revenue. Total US corporate tax receipts last year were around $304 billion.

US companies can defer taxes indefinitely on the profits they say they have earned overseas until they "repatriate" that money back to the US. Subject to some restrictions, deferred tax funds can be held in the US.

The US corporate tax rate is 35% but the effective rate is lower because of various allowances. In 2007, US tax expert Martin Sullivan said the effective tax rate was at a 10-year low of 22.2%. It compares with Ireland's 12.5% rate.

In 2005, Sullivan did an analysis on what he termed a $4.8 billion tax subsidy, which was the equivalent to an economic development grant from the US Treasury payable in part to the Irish government and in part to corporations investing in Ireland. He said of the $18.3 billion of profit reported by Irish subsidiaries of US multinationals in 2002, $13.7 billion did not belong there. With a statutory tax rate of 12.5%, Ireland collected approximately $1.7 billion of extra corporate tax on that shifted profit. "That's pure gravy for the Irish Treasury. At the same time, US corporations enjoyed a 22.5% lower rate (35% minus 12.5%) as a result of shifting income from the United States to Ireland. On $13.7 billion of profit, that is a tax reduction of $3.1 billion. Combining the two, the total US subsidy for Ireland attributable to profit shifting in 2002 equals $4.8 billion," he said.

The Treasury Department said in its background documentation, that in 2004, the most recent year for which data is available, American multinationals paid $16 billion in taxes on $700 billion in foreign income - - an effective rate of 2.3%.

Ireland has a tax exemption on patent income and two of Ireland's largest companies by revenue are owned by Microsoft. They have no staff; book billions in revenues; one of the Microsoft units pays tax to the Irish Exchequer; The other handles patent income from other overseas units and they operate from the offices of a Dublin law firm.

The Irish Exchequer directly gains billions in annual revenues from the profits that are shifted to Ireland, which are not related to Irish-based economic activity.

Irish operations of American firms made net profits of $48 billion in 2005, the latest period for which figures are available.

US Bureau of Economic Analysis data shows that the combined net profit of US corporations in Ireland was $8.58 billion in 1997, $13.39 billion in 2000 and reached $31.3 billion in 2003 - - despite a slowing in activity because of the high tech bust. The $48 billion net profit in Ireland in 2005 compares with $37.01 billion in the UK and $74.06 billion in the Netherlands. US companies in Germany reported  net profits of $11.22 billion in the same period while French operations made $9.52 billion and their Italian operations made $8.58 billion.

The US tax code has made it "all too easy for a...small number of individuals and companies to abuse overseas tax havens, to avoid paying any taxes at all," the President said on Monday. "And it's a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York."

President Obama said: "the way we make our businesses competitive is not to reward American companies operating overseas with a roughly 2% tax rate on foreign profits; a rate that costs -- that costs taxpayers tens of billions of dollars a year.  The way to make American businesses competitive is not to let some citizens and businesses dodge their responsibilities while ordinary Americans pick up the slack."

"On the campaign, I used to talk about the outrage of a building in the Cayman Islands that had over 12,000 business -- businesses claim this building as their headquarters.  And I've said before, either this is the largest building in the world or the largest tax scam in the world."

And I think the American people know which it is.  It's the kind of tax scam that we need to end.

The US Treasury put the number of corporates resident in one Cayman building at 18,857.

The Obama plan includes replacing tax advantages for creating jobs overseas with incentives to create them at home:

  • Reforming deferral rules to curb a tax advantage for investing and reinvesting overseas
  • Closing foreign tax credit loopholes
  • Using savings to make permanent the Tax Credit for investing in Research and Experimentation at home

Getting tough on overseas tax havens:

  • Eliminating loopholes for "disappearing" offshore subsidiaries
  • Cracking down on the abuse of tax Havens by individuals
  • Devoting new resources for IRS Enforcement to help close the International Tax Gap

Senate Finance Committee Chairman Max Baucus said on Monday, that President Obama's proposals "controversial" and may not be enacted this year.

"We want to make sure the playing field is level so our American companies are able to compete," Baucus told reporters before Senate votes Monday evening.

"It would be like an earthquake for high tech," said Carl Guardino, chief executive of Silicon Valley Leadership Group, an industry trade association."On a Richter scale of 1 to 10, this would be a 12."

Collectively, HP, IBM, Cisco, Microsoft and Google lowered their tax bills by a combined $7.4 billion in their last fiscal years by taking advantage of lower tax rates outside the US, according to an analysis by The Associated Press.

Through the years, these five tax companies have avoided US income taxes and foreign withholding taxes on a combined $72 billion in undistributed earnings from their foreign operations.

Google would have had an effective tax rate of 45.2% instead of 27.8% last year if it hadn't been able to capitalise on lower rates overseas, according to the company's annual report.

"President Obama’s plan today to increase taxes on American corporations is the wrong idea at the wrong time for the wrong reasons. This plan will reduce the ability of US companies to compete in foreign markets, which will not only reduce jobs, but will also cripple economic growth here in the United States. It couldn’t come at a worse time," said John J. Castellani, President of Business Roundtable - - an association of chief executive officers of leading U.S. companies with more than $5 trillion in annual revenues and nearly 10 million employees.

"Ninety-five percent of the world's consumers live outside the United States, making international growth key to US companies’ success. When U.S. companies expand abroad, America’s exports go up and America’s workers gain access to more and better paying jobs at home. This proposal would reduce companies’ ability to compete abroad, cutting off these benefits to U.S. workers," he continued. "Business Roundtable supports the closing of tax loopholes, but given what a fundamental change this represents to our tax system – far beyond targeting so-called loopholes – to say nothing of the dramatic, negative economic impact it will have, President Obama’s proposals should only be considered in the context of broader tax reform that is designed to increase the competitiveness of US companies."

Speaker of Congress Nancy Pelosi said in a statement:"I welcome the strong initiative outlined by President Obama today that will restore fairness to the tax code by closing international tax loopholes and crack down on tax havens. The President's proposal builds upon Chairman Rangel's ongoing leadership toward creating a more simple and fair tax code that rewards US job creation while at the same time promoting competitiveness in the global market.

"I look forward to working with the President and Members of Congress to advance these proposals and close these loopholes."

The White House said on Monday, that one of the most frequent questions it gets, whether through its comment form or through the Open for Questions session it launched for the President’s online town hall, is about the incentives in the tax code for companies to shift jobs overseas. This was one of the top questions in the jobs section, for example:

"What are your plans to encourage corporations to keep middle class jobs, such as customer service call centers and transactional based support services like accounting and computer program jobs, in the US?" PAG, Houston, TX  

President closed his remarks on tax reform, with a reference to basic fairness:

"So the steps I am announcing today will help us deal with some of the most egregious examples of what's wrong with our tax code and will help us strengthen some of these other efforts.  It's a down payment on the larger tax reform we need to make our tax system simpler and fairer and more efficient for individuals and corporations.

Now, it will take time to undo the damage of distorted provisions that were slipped into our tax code by lobbyists and special interests, but with the steps I'm announcing today we are beginning to crack down on Americans who are bending or breaking the rules, and we're helping to ensure that all Americans are contributing their fair share.

In other words, we're beginning to restore fairness and balance to our tax code.  That's what I promised I would do during the campaign, that's what I'm committed to doing as President, and that is what I will work with members of my administration and members of Congress to accomplish in the months and years to come."

Foreign-owned companies, mainly American, are responsible for about 90% of Ireland's annual exports.

Wall Street Journal article Nov. 2005: Irish Subsidiary Lets Microsoft Slash Taxes in U.S. and Europe

Irish Economy: Home Truths on Irish Exports as Ireland faces a changed global economy in the decade ahead

Operations of US Multinational Companies in 2005(pdf)

US Multinationals Profit from Tax Havens

Two out of every three US companies paid no federal income taxes from 1998 through 2005; Among foreign corporations 68% did not pay taxes during the period

US Affiliates of Foreign Companies Operations in 2006 (pdf)

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