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Under a plan baked into the White House’s budget for 2016, U.S. corporations would theoretically be forced to pay hundreds of billions in new taxes on money kept abroad.
Levying fees on the $2.1 trillion in funds largely held by shell companies through an accounting trick called deferral, the move, which President Barack Obama announced last month, is aimed at raising cash for desperately needed public works programs and infrastructure improvements. If he is successful, companies would no longer have a legal way of avoiding the 35 percent corporate tax by indefinitely investing funds outside the U.S.
But analysts say it’s unlikely such a tax haven windfall will materialize, because it depends on being included in budget legislation drafted and passed by a Republican-controlled Congress. In that sense, the proposal — part of a larger fiscal document outlining where the White House stands on important questions — is seen as a starting gambit in tax reform negotiations.
Republican politicians have vowed to scupper the plans when they come before Congress, where the GOP has a four-seat majority in the Senate and overwhelming control of the House after midterm elections last year from which they emerged victorious and emboldened.
"For six years the president has pursued higher taxes and higher spending, and our economy has paid the price. This budget is simply more of the same,” said House Ways and Means Committee Chairman Paul Ryan, R-Wis.
Yet behind such a stance lie powerful business interests that have long stored cash offshore rather than paying U.S. taxes. Representing hundreds of multinational companies, the U.S. Chamber of Commerce and Business Roundtable successfully defended against more modest tax reforms in Obama’s first term.
Almost three-quarters of Fortune 500 companies operateenterprises abroad to shelter their cash, with Nike funneling money through Bermuda and Bank of America utilizing 264 shell companies. Ugland House, an infamous five-story office building in the Cayman Islands, is home to 18,857 companies.
Some of the most commonly utilized tax havens with low or nonexistent rates are the Netherlands, Ireland, Singapore, Hong Kong, Luxembourg and the Cayman Islands.
But reforming the system and attempting to tax those profits is now on the agenda — including, to some extent, among elements of the Republican Party. “This issue of corporate profits parked overseas essentially to avoid the U.S. corporate tax rate sort of [entered] mainstream consciousness last year,” said Lindsay Koshgarian of the Massachusetts-based National Priorities Project.
Conservatives are vehement in their opposition to the White House plan, though many say some form of reform is needed to tax offshore profits. “The fight is over the level of the tax. Obama wants 14 percent of past profits and 19 percent of future profits,” said Daniel J. Mitchell, a senior fellow at the Cato Institute, a conservative think tank. “That's viewed as absurdly greedy, considering that all this income already has been subject to all applicable taxes in the nations where it was earned.”
Top Tax Havens for US Multinational Companies (2010, in billions)
But the Obama plan could seed discussions “as part of a larger debate about tax reform with lots of proposals on the table for negotiation,” Koshgarian told Al Jazeera. “Having a more realistic tax rate and fewer loopholes would be a good thing. In terms of simplicity and transparency of the tax code, [there is] broad agreement that what we have now is not working very well.”
‘The fight is over the level of the tax. Obama wants 14 percent of past profits and 19 percent of future profits. That’s viewed as absurdly greedy, considering that all this income already has been subject to all applicable taxes in the nations where it was earned.’
But any watered-down version or alternative plan is likely to generate less revenue. The Obama plan calls for a 14 percent transition tax on existing corporate overseas profits — which some liberal critics of Obama’s proposal say isn’t high enough. Apple, General Electric and Microsoft have the most held offshore, so they would be hardest hit. Additionally, a 19 percent tax would be applied to future earnings.
Some analysts think the Obama proposal and proposed alternatives are not ideal but that the system should just be equalized. Richard Phillips, an analyst at the nonprofit group Citizens for Tax Justice, said, “Our preferred policy is that [corporations] should pay the same tax rate on domestic profits as on foreign profits. [Not doing that] encourages them to play games and shift profits overseas and incentivizes them to shift operations,” he said.