Companies face $190bn tax increase

American companies are facing a much higher tax bill with the proposal unveiled today by the president in his administration’s attempt to hunt down tax havens.  The $190bn worth of increase in taxes are to be shared by the $86.5 billion expected to be generated by

“…targeting a strategy that allows U.S.-based multinational companies to effectively hide from the IRS the role their foreign subsidiaries play in shifting profits into low-tax jurisdictions such as the Cayman Islands, …a $60.1 billion plan to limit many expense deductions for American companies that take advantage of laws allowing them to defer tax on foreign profits and a $43 billion crackdown on abusive foreign tax credits…”

The deferral came about as the rule that made it easier for the IRS and companies to file paperwork “allowing companies to classify entities within their corporate structure in the most tax-efficient manner without inviting a tax challenge”.  Meanwhile, tax deductible part of Obama’s proposal is based on the current strategy employed by companies wherein a new entity (subsidiary) is created through an offshore account where companies could shift their profits and taxed at a lower rate. Upon “borrowing” from the subsidiary, the interest paid from those borrowings become deductible for the US companies.

Obama also proposed the end of the abuse of the foreign tax credit received by companies wherein there is a dollar-for-dollar credit for taxes paid for foreign governments.  Firms are expected to employ this strategy and gain as much as $43 billion.

With all these proposals, Obama is surely waging a war against corporate America. With this much taxes taken against the earnings of firms, this could only yet again slow down the growth and recovery of the country.  Worse, the resulting higher costs would have Obama see operations of some big companies move elsewhere where taxation is less of a burden and the overall business atmosphere is friendlier.  One that comes to mind: China.  As a country that envisions better, faster growth along with their already cheap labor, it might not take long for companies to expand/move their operations in the country where the government is more welcoming and less threatening than what Obama has expectedly become. That in effect, brings double benefit to the companies.

This is going to be one of the biggest fights for the corporate community for the next couple of years, says Kenneth Kies, a tax lobbyist.

Source: Bloomberg

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