In an effort to pay for its increased spending the Obama Administration is going after corporate overseas earnings. This could mean diminished competitiveness for U.S. companies operating overseas. Companies like Intel and Nike would suffer under new rules proposed by the Administration. “The bottom line is they have proposed a tax increase of $190 billion on overseas activities of U.S. multinationals,” said Kenneth J. Kiles who has represented General Electric, Microsoft and others on tax issues.
The Administration has already factored in the new tax receipts calculating them into its budget figures for 2011.
The U.S. corporate tax rate is 35 percent. Businesses operating outside the U.S. don’t pay that on profits overseas unless they bring the money home.
The current tax-deferral system is an attempt to deal with the fact that most other countries don’t tax their companies’ overseas profits. The U.S. is just behind Japan in its corporate tax rate at 39.25 percent for the combined (central, regional, and local) 2008 corporate tax rate.
This puts U.S. companies at a competitive disadvantage. If a company brings the profits home or pays them as dividends the tax bill becomes due.
The territorial tax system embraced by most of the world eliminates the incentive to hold money abroad that America’s deferral system creates.
Few companies pay the 35 percent rate because of the foreign tax deferral and other deductions, credits and loop holes. An overly complex tax code coupled with a high statutory tax rate creates a system that is expensive to administer and inefficient at collecting revenue.
U.S. companies pay the foreign tax rate in effect where it is operating, say 15 percent. When the money comes back it is taxed at 35 percent minus a credit for the 15 percent already paid. Since foreign businesses only pay the 15 percent U.S. companies are at a competitive disadvantage.
According to the lead lobbyist for the Information Technology Industry Council, Ralph Hellmann the overseas tax issue is probably the top issue right now for the tech community. “This one hits the bottom line of companies more than any other issue right now. We have to defeat it.”