Obama Calls for Curbs on Offshore Tax Havens

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By JACKIE CALMES and EDMUND L. ANDREWS

Published: May 4, 2009

WASHINGTON — President Obama on Monday called for curbing offshore tax havens and corporate tax breaks to collect billions of dollars more from multinational companies and

Doug Mills/The New York Times

President Obama, with the Treasury secretary, Timothy Geithner, said some companies and rich people were “shirking.”

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Proposals to Curb Offshore Corporate Tax Havens

The move would appeal to growing populist anger among taxpayers but is likely to open an epic battle with some major powers in American commerce.

With the proposals he outlined at the White House, the president sought to make good on his campaign promise to end tax breaks “for companies that ship jobs overseas.”

He estimated the changes would raise $210 billion over the next decade and help offset tax cuts for middle-income taxpayers as well as a permanent tax credit for companies’ research and development costs.

The changes, if enacted, would take effect in 2011, when administration officials presume the economy will have recovered from the recession. But business groups were quick to condemn the White House for proposing tax increases amid a global downturn.

“This plan will reduce the ability of U.S. companies to compete in foreign markets, which will not only reduce jobs, but will also cripple economic growth here in the United States. It couldn’t come at a worse time,” said John J. Castellani, president of the Business Roundtable, a trade association of major businesses.

The proposals would especially hit pharmaceutical, technology, financial and consumer goods companies — among them Goldman Sachs, Microsoft, Pfizer and Procter & Gamble — that have major overseas operations or subsidiaries in tax havens like the Cayman Islands.

They have some of the mightiest lobbying armies in Washington, as well as influential patrons in Congress. That combination will test Mr. Obama’s ability to stand up to powerful interests and marshal support among lawmakers at the same time that he is trying to win passage of major health and energy measures.

At issue are tax laws that were originally intended to prevent multinational corporations from being double-taxed, by the United States and by foreign countries, by allowing companies to defer reporting their foreign income to the Internal Revenue Service and to get tax credits in the United States for foreign taxes paid.

Economists are divided over whether higher taxes would give corporations incentives to move jobs overseas or impair economic growth at home. In the coming debate, both Mr. Obama and the business lobby will claim that their way will save jobs.

The top corporate tax rate is 35 percent, but the Treasury Department estimated that in 2004, the most recent year for which data is available, American multinationals paid $16 billion in taxes on $700 billion in foreign income — an effective rate of 2.3 percent.

Mr. Obama’s tax-raising initiative comes amid government bailouts for major financial institutions, auto companies and insurance giants, and polls show growing opposition. In February, a Senate proposal to give multinational companies a big tax cut if they brought profits back to the United States was defeated by a surprisingly large margin.

The president, in his remarks, reflected the public’s restlessness in some of his most populist language to date.

Mr. Obama said most Americans paid taxes as “an obligation of citizenship,” but some businesses and rich people were “shirking” their duties, “aided and abetted by a broken tax system, written by well-connected lobbyists on behalf of well-heeled interests and individuals.”

“It’s a tax code full of corporate loopholes that makes it perfectly legal for companies to avoid paying their fair share. It’s a tax code that makes it all too easy for a number — a small number of individuals and companies to abuse overseas tax havens to avoid paying any taxes at all,” the president said. “And it’s a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York.”

The Democratic chairmen of the House and Senate tax-writing committees, Representative Charles B. Rangel of New York and Senator Max Baucus of Montana, said in statements that some of Mr. Obama’s proposals reflect ideas from their panels. But Mr. Baucus kept his distance, saying “further study is needed to assess the impact of this plan on U.S. business.”

Congressional Republicans were relatively quiet. Senator Charles E. Grassley of Iowa, the senior Republican on the Senate Finance Committee and a frequent critic of tax schemes, said the president could “count on my support” to crack down on abuses. “But if he’s using tax shelters as a stalking horse to raise taxes on corporations at the cost of U.S. jobs, he’ll lose me.”

Business groups had feared Mr. Obama would seek repeal of the tax-deferral law but he stopped short of that. Instead, he would prohibit companies from taking deductions in the United States for expenses on overseas investments until they have paid domestic taxes on the profits from those investments. Treasury estimated the proposal would raise $60.1 billion from 2011 through 2019.

General Electric has deferred American taxes on $75 billion in foreign profits by keeping them outside the United States, according to its annual report for 2008, and said it has no plan to ever repatriate that money. Citigroup has deferred taxes on $22.8 billion in foreign income.

The administration would raise $86.5 billion by ending a practice in which companies create foreign subsidiaries to shift income in ways that avoid taxes.

The Government Accountability Office has found that 83 of the 100 largest American companies have subsidiaries in tax havens; it counted 83 subsidiaries for Procter & Gamble alone. Financial services companies had even more, with Citigroup showing 427 and Morgan Stanley, 273.

Another proposal would close a loophole that allows companies to inflate the credits they claim for foreign taxes to the I.R.S., for an estimated $43 billion in new revenues. Separate steps to crack down on wealthy individuals would raise nearly $9 billion.

Tax experts, including some with Democratic leanings, caution that the proposals could put American corporations at a competitive disadvantage. The United States is part of a dwindling minority of industrialized countries that tries to tax corporate profits on a global basis. Most European governments tax corporations on the basis of their profits within their borders. “If other countries are adopting systems that are friendlier to multinational corporations, then companies will have an incentive to locate their corporate headquarters outside the United States,” said Alan Auerbach, a professor of economics at the University of California, Berkeley, who advised Senator John Kerry during his 2004 presidential campaign.

James Hines, an economics professor at the University of Michigan, suggested the president’s proposals could be seen as creating unfair trade advantages for domestic goods and services.