An anti-outsourcing Democrat Bill hell bent on taxing US firms’ offshore earnings failed a key vote in the Senate on Tuesday, in a legislative humiliation for the embattled Democrats just weeks ahead of the Congressional mid-term elections.
With just 53 votes, the proposed legislation didn’t come close to beating a filibuster. The Democrats couldn’t muster the 60 votes needed to cut off debate on the measure, which includes a payroll tax break for companies that move jobs to the US from overseas. The Senate voted 53-45.
Senate Republican Leader Mitch McConnell on Tuesday described the nixed Bill as a bad idea; “This Bill is a purely political exercise aimed at making a good impression in an election year.”
The “Creating American Jobs and End Offshoring Act” was trying to ban government contractors from moving jobs offshore. The Bill also contained provisions to prevent US MNCs from deferring US taxes on the income they make from foreign arms.
In May last year, the Obama administration took aim at US MNCs and outsourcing by proposing tax measures designed to reduce the benefit of tax deferral for US firms on offshore earnings.
This Bill which included Obama’s plan to revamp tax rules, end the tax deferral system and aggressively collect taxes on corporate foreign earnings sparked a visceral reaction from corporate America.
Obama had campaigned relentlessly for the Bill saying new laws would close international tax loopholes producing $210 billion in tax revenues over the next ten years. The administration said that in 2004, US multinationals paid $16 billion in US taxes on $700 billion of foreign active earnings — an effective US tax rate of 2.3%.
The administration estimated it would eliminate $103.1 billion in tax advantages for investing overseas. These savings would come from reforming corporate tax deferral rules so that companies could not defer paying US taxes on the profits from overseas investments while taking immediate deductions for expenses from those investments.
The new tax rules would have affected multinationals such as General Electric and Proctor & Gamble and US outsourcers of every stripe. They would have been hit with a higher tax bill if deferrals were eliminated.
While lobbying the Bill Obama said the existing system gives US companies an incentive to invest overseas in countries like India rather than create jobs in the US: “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.”
However, US businesses argue the deferral system helps them compete against foreign companies that pay taxes only in the countries where they generate profits. Under current law, US companies with subsidiaries in foreign countries can defer paying US taxes on the profits of those subsidiaries until the money is repatriated to America.
“Deferral has been mischaracterised as a “tax break” but is actually a vital mechanism providing relief for American businesses from double taxation,” said Chamber of Commerce chief economist Marty Regalia.
Faced with a 35% US corporate tax rate which soars above the 25% OECD average, it is not surprising that US companies try to keep earnings offshore for as long as possible. Corporate America says the current tax rules are aimed at putting US firms on an “equal tax footing” with foreign rivals who benefit from favourable tax regimes in their home countries.