Obama Seeks to Close Overseas Tax Loopholes Despite Business Group’s Objections

May 4, 2009 - 6:00 PM
While President Barack Obama says tackling overseas tax havens will "level the playing field," a prominent business group contends the president's proposal to close loopholes and hire 800 additional IRS agents is "wrong."

President Barack Obama congratulates Commerce Secretary Gary Locke and Health and Human Services Secretary Kathleen Sebelius after their ceremonial swearing-in in the East Room of the White House in Washington, Friday, May 1, 2009. (AP Photo/Charles Dhrupad)

White House (CNSNews.com) - While President Barack Obama says tackling overseas tax havens will “level the playing field,” a prominent business group contends the president’s proposal to close loopholes and hire 800 additional IRS agents is “wrong.”
 
“President Obama’s plan today to increase taxes on American corporations is the wrong idea at the wrong time for the wrong reasons,” said John J. Castellani, president of the Business Roundtable, a pro-business lobby group, in a statement.
 
“This plan will reduce the ability of U.S. 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,” Castellani said.
 
But Obama, joined Monday by Treasury Secretary Timothy Geithner at the White House to announce the policy, stressed that significant abuse is happening. One example is an address in the Cayman Islands – one address – that apparently is used by 18,857 corporations, few of which businesses actually have a physical presence on the island.
 
“I’ve said before, either this is the largest building in the world or the largest tax scam in the world,” Obama said. “And I think the American people know which it is. It’s the kind of tax scam that we need to end. That’s why we are closing one of our biggest tax loopholes. 
 
“It’s a loophole that lets subsidiaries of some of our largest companies tell the IRS that they’re paying taxes abroad, tell foreign governments that they’re paying taxes elsewhere – and avoid paying taxes anywhere,” he said.
 
Obama’s goal is to replace tax advantages for creating jobs overseas with incentives to create jobs in the United States. Shutting apparent loopholes would raise $103.1 billion over 10 years, according to the White House. Part of that savings, $74.5 billion, would be redirected to tax credits for research and innovation in the United States. (See Obama Plan)  
 
Under the current law, businesses that invest overseas can take immediate deductions on their tax returns for expenses supporting their international investments, and defer paying U.S. taxes on the profits they make from these investments, according to the White House.
 
Under the Obama proposal, companies would not be able to receive deductions on their U.S. tax returns supporting offshore investments until they pay taxes on offshore profits.
 
Current law also allows U.S. businesses that pay foreign taxes on overseas profits to claim a credit against their U.S. taxes for foreign taxes paid. The Obama plan would not allow that to happen.
 
The plan would also require more transparency and disclosure rules for companies to report when income has shifted from one foreign subsidiary to another. Further, the plan would crack down on the use of tax havens by individuals. These two measures would reportedly raise revenue by an estimated $95.2 billion over the next 10 years.
 
The Obama administration’s budget for 2010 includes the hiring of nearly 800 new Internal Revenue Service employees devoted to enforcement of international tax rules and cracking down on offshore tax avoidance.
 
“It’s a tax code that makes it all too easy for a number – a small number of individuals and companies to abuse overseas tax havens to avoid paying any taxes at all, 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, N.Y.,” Obama said.
 
He later added, “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.”
 
Senate Minority Leader Mitch McConnell (R-Ky.) said the president’s proposal would, in effect, amount to a tax increase during a recession, which would likely drive jobs overseas.
 
“I certainly support reforming the tax system and agree with the president that we must crack down on tax evasion through the use of tax shelters or abuse of offshore bank accounts,” McConnell said.
 
“But as to the larger part of his proposal, I cannot endorse a plan that gives preferential treatment to foreign companies at the expense of U.S.-based companies and the 52 million people they employ,” he said.
 
About 95 percent of consumers live outside the United States, and this legislation would make international growth more difficult, said Castellani.
 
“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,” Castellani said. “This proposal would reduce companies’ ability to compete abroad, cutting off these benefits to U.S. workers.”
 
He said his organization supports closing some 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 U.S. companies.”