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Obama proposes tax on foreign income held overseas by MNCs

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US President Barack Obama faced a backlash after proposing, in the $4trn budget for the 2016 financial year that was presented to Congress on 2 February, a minimum 19% tax on US multinationals’ foreign income and a one-off tax (at 14%) on previously untaxed foreign deferred profits.

Unlike US citizens, currently US companies pay little or no tax on earnings abroad until they are brought back into the US. Press reports suggest that Obama hopes to raise $238bn from the 14% one-off tax on the up to $2trn of cash that US companies have piled up overseas to fund the repair of America’s roads. The president also plans to impose a minimum 19% tax on multinationals’ future foreign earnings, giving companies a credit on foreign taxes and allowing them to be reinvested in the US with no additional penalty.

Professor Crawford Spence of Warwick Business School commented: ‘The US government has long levied income tax on US citizens abroad. However, it has until now left corporations free of this obligation, giving them discretion to move to low tax jurisdictions. This situation has been a contradiction given that corporations in the US are essentially treated as legal “persons”, with all the rights of individuals but not so many of the obligations. This latest move will go some way towards resolving that contradiction. The fact that Obama is linking the new tax to a public road building campaign sets firmly in the public’s mind the connection between corporate tax avoidance and public welfare. Equally, forcing US companies to pay tax on foreign profits goes some way towards international tax harmonisation, reducing the incentives to set up company headquarters and operations in tax havens such as Luxembourg. This could be an important step, not just for the US, but for governments worldwide who have lost track of their own companies’ financial affairs.’

However, Tim Wach, global managing director of Taxand, said ‘the attack on MNCs’ by Obama ‘ignores the crux of the issue’. ‘In many ways the US is lacking self-awareness and is avoiding a major policy issue by failing to recognise that its tax competitiveness is significantly lagging behind other major global economies,’ Wach said. ‘It is imperative for the US to enter the wider debate around the need for broad based tax reform. This would include a significant reform of its corporate tax system, which is rife with “tax preferences” which should be eliminated or at least reduced, allowing for a lower corporate tax rate without a reduction in government revenues. A lower corporate tax rate would be the most efficient and effective inducement for the repatriation of foreign corporate earnings. But such a tax reform debate would also include consideration of a European-style value added tax or VAT, widely regarded as the least harmful and distortive of taxes.’

Issue: 1249
Categories: News , International taxes