Obama proposes new tax on US firms’ foreign profits

President Barack Obama's fiscal 2016 budget proposes a 19 percent tax on the future foreign earnings of companies based in the United States and a one-time 14 percent tax on roughly $2 trillion in profits being held offshore, the White House said on Sunday.

"This transition tax would mean that companies have to pay U.S. tax right now on the $2 trillion they already have overseas, rather than being able to delay paying any U.S. tax indefinitely," a White House official said.

Revenues from the one-time tax would be used to fund projects to fix crumbling U.S. infrastructure and fill the projected shortfall in the Highway Trust Fund.

"Unlike a voluntary repatriation holiday, which the president opposes and which would lose revenue, the president’s proposed transition tax is a one-time, mandatory tax on previously untaxed foreign earnings, regardless of whether the earnings are repatriated," the official added.

The U.S. corporate tax rate is currently 35 percent, but loopholes allow many major corporations to avoid paying U.S. taxes altogether. Under current policies, foreign corporate earnings can be held offshore for years if they are classified as indefinitely invested abroad.

Obama’s proposal is aimed at closing that tax loophole. His administration has long been critical of practices by U.S. companies that it views as avoiding tax responsibilities at home. In 2013, the president proposed a similar plan that would cut the corporate tax rate to 28 percent as part of a grand bargain to bring profits home.

The 2016 budget, which is set for release on Monday, requires passage from Congress to take effect, and approval by the Republican-controlled legislature is unlikely. Republican response to the proposal has been lukewarm so far.

Obama's plan pushes back against years of pressure from corporations advocating for a tax holiday that would let them repatriate such earnings at a discounted tax rate. Former President George W. Bush, a Republican, passed such a measure in 2004, framing it as an economic stimulus. It did result in a substantial repatriation of deferred profits, but studies showed it did little for the economy.

In addition to the one-time tax, the Obama budget proposes that U.S. companies pay a 19 percent tax on all foreign earnings as they are earned, while a tax credit would be issued for foreign taxes paid. These funds would fill projected shortfalls in the Highway Trust Fund, which finances U.S. road construction and is funded by a fuel tax.

The Highway Trust Fund has suffered chronic shortfalls in recent years as revenue from fuel taxes, unchanged since 1993, have failed to keep pace with rising construction costs. Improved vehicle fuel economy has also affected fuel tax revenue. In August, Congress approved a stopgap measure to extend funding for construction projects through May 2015.

Obama's announcement follows a proposal released Friday on the same issue by U.S. Senators Barbara Boxer (D-Calif.) and Rand Paul (R-Ky.) for a 6.5 percent tax on corporations if they repatriate foreign earnings within five years. Critics said the senators' plan would undermine meaningful tax reform and encourage companies to shift money abroad while they wait for the next tax holiday.

Research firm Audit Analytics said in April 2014 that the total of U.S. companies' foreign earnings exceeded $2.1 trillion, rising 93 percent from 2008 to 2013. General Electric Co. was the U.S. company with the largest foreign earnings, at $110 billion, the research firm said. Next were Microsoft Corp. with $76.4 billion, Pfizer Inc. with $69 billion, Merck & Co Inc. with $57.1 billion and Apple Inc. with $54.4 billion.

Al Jazeera and wire services