David McFadden/AP

GOP stands in way of Obama gambit for offshore corporate cash

President proposes to tax companies’ foreign profits for half-trillion in revenue but faces tough congressional fight

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.

The Chamber, which spent $33 million for Republicans and against Democrats in the last election cycle, described his budget as “more spending, more taxes, more debt.”

Hundreds of billions in tax revenue are avoided through deferrals. Firms such as General Electric — which has reportedly avoided paying much U.S. tax in the past through a combination of creative accounting and aggressive lobbying — have figured prominently in the precipitous decline in the share of federal revenue paid by corporations, from about 30 percent in 1950 to 10 percent a half-century later.

Many Fortune 500 companies dedicate whole departments to minimizing their tax burden, taking advantage of tax breaks that critics slam as corporate welfare and loopholes that allow for storing capital overseas.

From left, Apple’s CFO Peter Oppenheimer, CEO Tim Cook and head of tax operations Phillip A. Bullock before testifying at a hearing on how multinational corporations shift profits offshore, on Capitol Hill in Washington in 2013.
J. Scott Applewhite/AP

Almost three-quarters of Fortune 500 companies operate enterprises 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.

And about half of the “offshore” funds registered to foreign subsidiaries are reportedly invested onshore in U.S. assets and securities. The Wall Street Journal has described the current state of U.S. laws as enticing corporations “to engage in semantic games, legal gymnastics and inefficient corporate-financing methods to shield profits from U.S. taxes.”

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.

The president’s new plan, which would reduce the corporate tax rate to 28 percent, was originally part of an unsuccessful 2012 grand bargain to discourage moving profits to foreign subsidiaries. The proposed tax would be mandatory, unlike a voluntary repatriation “holiday” signed by George W. Bush in 2004, which resulted in $360 billion being sent home.

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)
Country/Territory Reported Profits of US Subsidiaries Gross Domestic Product Subsidiary profits as % of GDP
Bermuda $94 $6 1643%
Cayman Islands $51 $3 1600%
British Virgin Islands $10 $1 1102%
Bahamas $10 $8 123%
Luxembourg $55 $52 106%
Ireland $87 $208 42%
Netherlands Antilles $1 $4 25%
Netherlands 127 772 16%
Cyprus $3 $23 13%
Barbados $0.4 $4 10%
Singapore $20 $217 9%
Switzerland $47 $551 9%

The U.S. Chamber of Commerce’s plan calls for a territorial taxation system that would tax offshore funds on the basis of location, but the Congressional Budget Office has said that would increase “incentives to shift business operations” abroad.

In January, Sens. Barbara Boxer, D-Calif., and Rand Paul, R-Ky., announced a rival scheme for a 6.5 percent tax on corporate earnings repatriated within five years —which would generate less money for highways than Obama’s proposal.

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.’

Daniel J. Mitchell

senior fellow, Cato Institute

Robert Pozen, an economist at the Brookings Institution, said Obama’s planned tax rates were likely “opening bids” in the process of lengthy negotiations with Republicans and are too high to be politically palatable to Republicans who have strong philosophical objections.

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.

The retroactive amount generated by that plan would be about $268 billion over 10 years. This includes an estimated $140 billion from the 30 companies that have the most money abroad, according to Safer America, a consumer advocacy group. Future expected revenue generated by the global minimum tax would be an additional $206 billion.

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.

Yet the whole debate around Obama’s plan is framed by the possibility that companies will always find ways to avoid U.S. taxes. Some critics say corporations will simply respond to any rule changes with new ways of dodging the tax man, reducing funding of important programs. Many corporations already work around tax regulations, not just by offshoring profits but also through inversion, in which they merge with a smaller foreign entity in a country with much lower tax rates.

Koshgarian said, “We need $3.6 trillion investment in infrastructure by 2020. [That] money needs to come from somewhere. Reallocating the federal budget is one way to do it, and another is revenue generation by overhauling [tax] loopholes.”

30 US companies with most funds in offshore accounts (2014, in billions of dollars)
Corporation Amount Parked Offshore Estimated Tax Avoidance Taxes Due Under Obama Plan Estimated Savings
Apple 111.3 36.4 14.6 21.9
General Electric 110.0 31.1 12.5 18.7
Microsoft 76.4 24.4 9.7 14.7
Pfizer 69.0 19.5 7.8 11.7
Merck 57.1 16.2 6.5 9.7
IBM 52.3 14.8 5.9 8.9
Johnson & Johnson 50.9 14.4 5.8 8.7
Cisco 48.0 13.6 5.4 8.1
Exxon Mobil 47.0 13.3 5.3 8.0
Citigroup 43.8 11.7 4.7 7.0
Procter & Gamble 42.0 11.9 4.8 7.1
Google 38.9 11.0 4.4 6.6
Hewlett-Packard 38.2 10.8 4.3 6.5
PepsiCo 34.1 9.7 3.9 5.8
Chevron 31.3 8.9 3.5 5.3
Coca-Cola 30.6 8.7 3.5 5.2
JP Morgan Chase 28.5 8.1 3.2 4.9
Oracle 26.2 8.0 3.2 4.8
Amgen 25.5 9.1 3.6 5.5
United Technologies 25.0 7.1 2.8 4.2
Abbott Laboratories 24.0 6.8 2.7 4.1
Bristol-Myers Squibb 24.0 6.8 2.7 4.1
Eli Lilly 23.7 8.3 3.3 5.0
Goldman Sachs 22.5 6.4 2.5 3.8
Qualcomm 21.6 7.6 3.0 4.6
Walmart 21.4 6.1 2.4 3.6
Medtronic 20.5 5.8 2.3 3.5
Intel 20.0 5.7 2.3 3.4
Dell 19.0 5.4 2.2 3.2
Bank of America 17.0 4.3 1.6 2.7

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