Norris, McLaughlin & Marcus

Obama Releases Plan to Overhaul U.S. Corporate Tax Code – Will It Discourage U.S. Business from Keeping Profit Offshore?

Boost U.S. Competitiveness; Create U.S. Jobs?

Partly in an effort to boost the competitiveness of U.S. corporations and partly to induce those corporations to keep or return jobs to the U.S., President Obama proposed a reduction in the U.S. tax rate on corporate profits. Obama’s proposal reduces the standard corporate tax rate from 35% to 28% with a further reduction to 25% for corporations manufacturing in the U.S. Many tax experts recommend a reduction in the U.S. top corporate rate (one of the highest in the world) to better enable U.S. corporations to compete in the global market. It appears that the administration agrees with those experts noting that a 28% top rate would be in line with other advanced economies.

The loss in revenue from the rate reductions will come from the elimination of tax loopholes. (The availability of tax breaks to many corporations results in reducing what would have otherwise been the higher 35% tax rate to rates of 25% or less.)

U.S. Companies Doing Business Offshore

One of the primary goals in reducing the 35% rate is to discourage U.S. companies from moving their assets and U.S. jobs abroad. (By some estimates, U.S. companies have over a trillion dollars parked overseas.  While it’s up for debate as to whether some of the current proposals in Congress for a tax repatriation holiday would bring some of that money back to the U.S. and whether it would really make any difference, a tax repatriation holiday is not currently part of the Obama Administration’s plan.)

In its effort to discourage U.S. corporations from moving assets overseas, the administration proposed imposing a new minimum tax rate on the foreign profits of U.S. multinational companies; however, the current proposal does not offer any sense of what that minimum tax rate would be.

Will the Repatriation of U.S. Corporate Profits Create U.S. Jobs?

 Under the current corporate tax code, U.S. companies with foreign subsidiaries have a number of options to reduce their U.S. tax liability. One of the principal methods involves the deferral of the U.S. tax liability on their profits earned offshore until they repatriate those profits.  Basically, those companies can choose the time at which they want to bring the money home.

The administration’s proposal would require U.S. corporations with foreign income in low-tax countries to pay the minimum U.S. tax rate on that income in the tax year in which it’s earned in the foreign country. If the company pays income tax to the host country on those profits, it will get a foreign tax credit.

Under the proposal, the U.S. tax and foreign credit would work like this: If the U.S. minimum corporate tax rate is set at 25% and the U.S. company pays tax at the rate of 10% to its host country overseas, it will be entitled to a credit of 10% for foreign tax paid and pay the difference of 15% to the U.S.  The administration’s proposal does not address how U.S. companies with years of profits parked offshore would be treated under the new plan.

The administration’s plan also proposes to remove a tax deduction for the cost incurred by U.S. multinationals when they move operations overseas. In further support of its agenda, the plan would provide a 20% tax credit to U.S. multinationals that move operations back to the United States.

Stay tuned to the Business Without Borders Blog for further developments!

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