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Obama Targets Overseas Tax Dodge

Plan Would Crack Down On Individuals, Firms With Money Abroad

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President Barack Obama is proposing to close tax loopholes for companies and individuals with operations or bank accounts overseas.
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Washington Post Staff Writers
Tuesday, May 5, 2009

President Obama yesterday announced a major offensive against businesses and wealthy individuals who avoid U.S. taxes by parking cash overseas, a battle he said would be fought with new tax laws, new reporting requirements and an army of 800 new IRS agents.

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During an event at the White House, Obama said his proposal would raise $210 billion over the next decade and make good on his campaign pledge to eliminate tax advantages for companies that ship jobs abroad.

"I want to see our companies remain the most competitive in the world. But the way to make sure that happens is not to reward our companies for moving jobs off our shores or transferring profits to overseas tax havens," Obama said, flanked by Treasury Secretary Timothy F. Geithner and Internal Revenue Service Commissioner Douglas Shulman.

The nation's largest business groups immediately assailed the proposal, arguing that it would subject them to far higher taxes than their foreign competitors must pay and ultimately endanger U.S. jobs. Key Democrats were cool to the plan, and said Obama's ideas should be considered as part of a broader effort to streamline the nation's complex corporate tax code.

"Further study is needed to assess the impact of this plan on U.S. businesses," Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, which has jurisdiction over U.S. tax law, said in a written statement. "I want to make certain that our tax policies are fair and support the global competitiveness of U.S. businesses."

Yesterday's announcement offered the first details of a tax plan that was sketched out in the $3.4 trillion budget request that Obama sent to lawmakers earlier this year and that Congress approved last week. If the measures do not survive congressional scrutiny, the lost revenue would increase already-elevated deficit projections, unless lawmakers find money elsewhere.

Obama said his plan could serve as "a down payment on the larger tax reform we need to make our tax system simpler and fairer."

The proposal takes aim at what corporate executives consider to be one of the most critical features of the U.S. tax code: permission to indefinitely defer paying U.S. taxes on income earned overseas.

Currently, U.S. companies can avoid paying taxes on foreign profits until they bring the money back home. So a U.S. company doing business in Ireland, for example, must pay the Irish tax of 12.5 percent, like every other company doing business in Ireland. But the U.S. firm would owe an additional 22.5 percent to the U.S. Treasury (the difference between Ireland's tax rate and the 35 percent U.S. tax rate) unless it reinvests the money overseas.

The United States is the last major economic power to tax the profits of locally headquartered companies if that income is earned abroad. Other nations, including most recently Japan and Britain, are moving to a territorial system that taxes only corporate profits earned within their borders.

Instead of following that trend, Obama proposes to move in the opposite direction. He argues that the current system gives tax breaks to U.S. multinationals at the expense of companies that operate solely on American soil. In 2004, the most recent year for which statistics are available, U.S. multinationals paid an effective U.S. tax rate of just 2.3 percent on $700 billion in foreign profits, according to the administration.

"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 president said yesterday.


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