Google, Intel, General Electric and Hewlett-Packard may lose tax credits and be forced to pony up more in the form of tax dollars to Uncle Sam.
If you’re wondering what these companies have in common – they all have operations outside of the United States. Barack Obama reiterated in no uncertain terms that there will be no tax breaks for companies creating jobs outside US.
Recently, at a White House meeting that was meant to reveal the tax reforms to ensure American multinationals start paying corporate taxes and keep jobs within the US, President Obama spoke strongly about the existing US system, giving the example of India. He said, it encourages paying “lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York.”
Under the existing US tax code, American companies with subsidiaries in foreign countries, do not have to pay US taxes on the profits from their subsidiaries until the time when money is transferred back to the US. As long as the money earned is put back into the foreign subsidiaries, they can avoid paying taxes and US businesses take advantage of this “loophole” as many call it, in the tax code. This means creating more jobs in other countries where the subsidiaries exist.
The change in plan, revealed by Obama is to prevent US firms from enjoying foreign tax credits on income that is not subject to US taxes. Also the firms that are now able to shift income legally from one foreign subsidiary to another, to avoid taxes, cannot do so anymore.
According to Obama, the existing tax code acts as an incentive for US companies to invest overseas instead of providing jobs within the US. The government hopes to raise $210 billion in tax revenue in ten years, with the implementation of the new plan.
Under the new plan, US companies with foreign subsidiaries will lose all tax credits and will be have to cough up more tax.
Obama said during the White House announcement, “I want to see our companies remain the most competitive in the world. But the way to make sure that happens is not to reward our companies for moving jobs off our shores or transferring profits to overseas tax havens.”
Experts say that a wide-range of companies will be impacted by the changes, from banking institutions to hedge funds, from technology companies to pharmaceuticals.
Drew Lyon, a principal at PricewaterhouseCoopers’ Washington office who is a tax policy advisor for Fortune 500 companies says, “It’s really hitting most Fortune 100 companies that depend to a great deal on growth of foreign markets for growing their total earnings. About half of multinationals companies’ income is earned abroad.”
Proponents of these tax changes say that they have also been expecting the top U.S. corporate tax rate to be reduced, since most other countries have lower corporate tax rates. They feel that foreign tax credit changes alone will most likely be a discouragement for companies to invest in the US. There also has to be a reduction in corporate rate, which would help create jobs in the United States because then there would not be a huge advantage for businesses to move to countries that are tax friendly.
Tax policy experts agree with this and say that these measures, unless accompanied by a reduction in the corporate tax rate, will only have the opposite effect of companies moving their operations, as well as jobs, overseas to more tax friendly countries.
Opponents within the Obama government and several business groups have already started lobbying against this to kill any attempts at increasing taxes on overseas profits. They say that such a move would only make American companies less competitive.
Foreign companies are not really worried with this stance taken by the President and heave a sigh of relief. This is because these tax proposals have nothing to do with off shoring or outsourcing. They say that the proposals appear to be aimed at addressing the tax rate differentials that exist across the world. It will impact only American headquartered companies with operations overseas.
Several analyst firms in the US are of the opinion that it is shortsighted to think that outsourcing is reversible and cutting tax breaks will help in the creation of jobs in the US. They feel that the consequences of such a move engulfing different countries can be larger than the current recessionary scenario.