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News : US Economy Last Updated: Feb 7, 2014 - 5:44 AM


Corporate Tax 2014: Obama running with the hare and hunting with the hounds
By Michael Hennigan, Finfacts founder and editor
Feb 6, 2014 - 10:21 AM

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Silicon Valley is the one sector of American business where the Democratic Party can beat the Republicans in fund raising: President Barack Obama joins a toast with Technology Business Leaders at a dinner in Woodside, California, Feb. 17, 2011. Apple's Steve Jobs is on the left of the president and Oracle's Larry Ellison is opposite him. Mark Zuckerberg, Facebook co-founder and CEO, is on the president's right.

Corporate Tax 2014: President Obama having campaigned in 2008 to reform the corporate code but with no progress made with the Congress in the interval, is now forced into running with the hare and hunting with the hounds, as work is underway to reform international tax rules.

Richard Rubin and Jesse Drucker of Bloomberg News write that "the Obama administration wants to prevent US companies from being singled out by European regulators and to ensure that the US doesn’t miss out on any taxes its companies start paying."

Bloomberg  News says that the OECD is drafting plans limiting how companies take deductions in one country without reporting profits in another, as well as making it harder to avoid tax by shifting intellectual property to offshore units.

“The US doesn’t seem that involved in the project, so the question is: 'What do they want the project to achieve?'” said Chris Lenon, the International Chamber of Commerce’s liaison to the OECD’s project.

Rubin and Drucker report that President Obama "hasn’t repealed the so-called check-the-box rule, which effectively prevents the US from taxing profits moved into haven subsidiaries, said Reuven Avi-Yonah, an international tax law professor at the University of Michigan."

They also write that US companies are particularly concerned about other countries making unilateral changes to their tax laws as the OECD project goes forward, throwing the international tax system into further disarray.

President Obama said in May 2009: "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 president was referring to Ugland House and what happens there isn't a scam, swindle or confidence trick.

With most forms of corporate bribery legalised in the United States, companies can 'honestly' say they comply with the laws in both the US and the Caribbean.

Also in 2009, Senator Dick Durbin of Illinois said in a radio interview in Chicago: “Hard to believe in a time when we are facing a banking crisis, that many of the banks created, that the banks are still the most powerful lobby on Capitol Hill. They frankly own the place.“

A 2008 Government Accounting Office (GAO) report found no evidence of illegal activity by Maples and Calder, which opened an office in Dublin's offshore financial centre in 2006, or any of the entities registered at Ugland House. Less than half have billing addresses in the United States.

The report said one quarter of the 100 largest contractors with the US federal government had subsidiaries in the Caymans. At least 10 of the 30 companies listed in the Dow Jones Industrial Average had units with addresses in the Caymans.

Source: US Senate Budget Committee, May 2011

IDA Ireland, the inward investment agency, hired a Washington DC lobbying firm, in response to fears that the corporate tax status quo would change.

Nothing happened in Congress while firms with cash hoards technically overseas, against a backdrop of a high budget deficit and unemployment,  lobbied for a tax amnesty similar to one that had been introduced in 2003 when a special 5% tax rate was offered to encourage repatriation of profits.

Repatriation critics such as Ed Kleinbard, a tax law professor at University of Southern California, points out that much of multinationals’ liquid assets are already in US financial instruments. “It’s not like we open the door to let the puppy [in] out of the rain, letting the poor dollars find their warm home here in the US,” he said in a conference call with reporters according to The Fiscal Times. “A large portion of that $1.4trn in assets is held in US bank deposits, US commercial paper, US government securities, and the debt obligations of other US firms,” because the ultimate owners of the companies keep their assets in US dollars, he said. “The route [of the money] is a little bit indirect, but it’s already here and working for all of us collectively.

President Obama in his State of the Union message in January  2012 proposed creating an international minimum tax that companies with overseas profits would have to pay.

He said the corporate tax rate should be reduced to 28%, from 35%, with a lower rate of 25% for manufacturing firms.

The Obama administration did not stipulate what a minimum rate should apply.

Robert Pozen of the Brookings Institution had said in 2011that corporations should no longer be allowed to indefinitely defer American taxes on profits in low-tax jurisdictions but a 20% levy should be reduced to reflect any taxes paid by United States multinationals in low-tax countries.

He said if a foreign subsidiary of an American corporation pays some tax in a low-tax jurisdiction, it should receive a tax credit for that amount against the 20% tax. For example, if corporate profits in Ireland were taxed at 12.5%, they would be subject to an American tax of only 7.5% (20% minus 12.5%).

Such a change would negate the tax benefit from Ireland's low rate.

Recent Finfacts tax reports:

Foreign government requests Bermuda to investigate Microsoft's Irish-linked subsidiaries

Corporate Tax: Kenny reassures Facebook but Ireland's rate is too high

G-20 Australian presidency focuses on tax "leaking bucket"; Ireland still in denial?

US company profits per Irish employee at $970,000; Tax paid in Ireland at $25,000

Corporate tax reform and the biggest tech tax havens

Ireland's new International Tax Charter: More political kabuki

Ireland's tax man for Silicon Valley

Corporate Tax 2014: UK's revenues plunge; France considers reform

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