America Inc to fight Obama tax plan tooth & nail

US president Barack Obama’s plan to revamp tax rules, end the tax deferral system and aggressively collect taxes on corporate foreign earnings sparked a visceral reaction on Monday from corporate America. It also got a cagey response from Capitol Hill.

The new rules will affect multinationals such as General Electric and Proctor & Gamble and US outsourcers of every stripe. US tech firms which have significant operations in India say they are concerned that they could be hit with a much higher tax bill if deferrals are eliminated.

Rajiv Khanna, partner in legal firm Greenberg Traurig and president of the India-America Chamber of Commerce, said the proposed tax plan attempted to plug the tax arbitrage loophole, but would make doing business more expensive.

“You don’t create economic prosperity in the US by destroying the global competitiveness of American companies,” said Khanna, adding that the Obama plan took unfair aim at outsourcing which helped US firms stay competitive.

“It is the wrong idea, at the wrong time for the wrong reasons,” said John Castellani, president of the Business Roundtable, an association of CEOs of major corporations.
Speaking in the White House on Monday, Obama vowed to push forward with his plan, which would curb overseas tax advantages enjoyed by US firms.

“The US tax code 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,” he said.

Obama contends that 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,” Obama said Monday.

US businesses argue the deferral system helps them compete against foreign companies that pay taxes only in the countries where they generate profits.

“The proposals are disastrous. US corporate tax of 35% is one of the highest in the world,” said a senior executive at IBM, which has more than 70,000 employees in India. About 58% of IBM’s revenue now comes from outside North America.

“Ending the deferral system would be an increased expense for US companies. It makes us less competitive against foreign firms who are only subject to one level of tax,” he added.

Under current law, American corporations with subsidiaries in foreign countries can defer paying US taxes on the profits of those subsidiaries until the money is repatriated to the US.

If US companies leave the money overseas, they can avoid American taxes on those profits indefinitely. If the money is brought to the US, corporations can subtract foreign taxes already paid.

Corporate America says the current tax rules are aimed primarily at putting US companies on an “equal tax footing” with international rivals, many of which benefit from favourable tax treatment by their home countries.

It is not a slam-dunk proposal, however. Obama expects a major fight with corporations, lobbyists and their supporters in Congress.

“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.

The Chamber and about 200 big US firms have already signed a petition asking Congress to kill the plan.