(MENAFN- Gulf Times) President Barack Obama's proposal to tax the offshore profits of US Corps could encourage all but the largest companies to follow their cash hoard overseas, according to business leaders and tax lawyers.
The plan would levy a one-time tax of 14% on the $2.1tn US companies have stockpiled abroad, sidestepping the Internal Revenue Service. It also calls for a 19% minimum tax on future foreign earnings. The prospect of those increased taxes could spur some companies to relinquish their US residency altogether - either by merging with a foreign partner in a corporate inversion or finding a foreign buyer, according to J Richard Harvey, a former senior official for the Treasury Department and the IRS.
Tax lawyers said there could even be a rush to do so to avoid limitations the administration is also proposing on inversions, in which US companies shift their addresses overseas to tax-friendly locations. "They are already looking to invert under current law, so if you lay over additional taxes, it seems inevitable that there will be even more incentive for them to get out of Dodge," said Harvey, a tax professor at Villanova School of Law in Pennsylvania.
Most of the offshore corporate profits that would be subject to the tax is controlled by the giants of the technology, finance and pharmaceutical sectors, whose sheer size makes it difficult to find a merger or buyout partner. Companies like General Electric Co, Microsoft Corp and Citigroup would take a big one-time hit to earnings, even though the rate is less than half of that levied on domestic income. Apple, which has reported keeping $137bn indefinitely invested offshore, would owe nearly $18bn under the Obama plan; JPMorgan Chase & Co, which holds $28.5bn, could expect a tax bill of $2.5bn.
Though the measure would have an immediate impact on earnings, the companies could pay the taxes over five years. Andrew Gray, a JPMorgan spokesman, declined to comment. Steve Dowling, a spokesman for Apple, didn't immediately respond to an e-mail and a phone call seeking comment. Obama's corporate tax plan, which received a cool welcome from Republicans and business leaders, is viewed as an opening bid in the negotiation to rewrite the convoluted US corporate tax code, which imposes a top rate of 35% on worldwide income, but only taxes foreign income when it's brought home. The president suggests lowering that top rate to 28% and to 25% for manufacturers.
US companies have been pushing for an overhaul for years, saying that it puts them at a disadvantage compared with competitors from countries that only tax domestic income. Others argue that the US system rewards multinational Corps with aggressive tax strategies, allowing them to shift their burden to individual taxpayers and companies without overseas operations.
The White House proposal also would bring a drop in profit for the companies with cash stockpiled overseas because it would force them to declare the tax bill immediately as an expense against earnings. Currently, companies can defer declaring a tax expense on overseas profits until they are brought back to the US and become subject to federal taxes.
That could be significant for companies like Eli Lilly & Co, which holds $23.7bn in overseas profits, equal to almost a third of its $79bn market capitalisation. The Obama proposal would create a one-time tax of as much as $3.3bn, which would also be reported as an expense, and is larger than the company's entire 2014 net income of $2.39bn. The final tally would depend in part on whether credits for foreign taxes paid could offset part of the US bill. Lauren Zierke, a spokeswoman for Eli Lilly, declined to comment, and pointed to a statement from Let's Invest for Tomorrow America, a coalition of US-based companies.
The Obama plan would "move the US further away from the solutions we need to strengthen our competitiveness abroad and grow our economy here at home," said Claire Buchan Parker, a spokeswoman for the group.
Robert Ricketts, a tax professor at Texas Tech University in Lubbock, said many US companies that stockpiled cash overseas have been motivated by a desire to manage their earnings rather than to reduce their taxes. Pushing their potential tax expenses into the future allowed them to report higher earnings.
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