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Taxing Offshore Profits
When President Barack Obama announced he would move to restrict tax breaks for companies with overseas holdings on May 4, he said the proposal was "a down payment on the larger tax reform we need to make our tax system simpler and fairer." "I want to see our companies remain the most competitive in the world," Obama said. "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." He also said the current tax code, as written, is "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 United States, unlike the rest of the world's economic powers, taxes the profits of American-headquartered companies if that income is earned outside the country. Other nations, such as Japan and Britain, are said to be moving towards a territorial system in which only profits earned within a country's border can be taxed. But the administration argues that the current tax code provides economic breaks for U.S.-based multinationals at the expense of companies that solely operate within America. The administration said that in 2004, U.S. multinationals paid an overall tax rate of only 2.3 percent on $700 billion in foreign profits. Steve Ballmer, Microsoft CEO, thinks Obama's proposal will ultimately work against U.S. businesses. "It makes U.S. jobs more expensive," Ballmer said of the proposal last week. "We're better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S." Business Roundtable President John J. Castellani also came out against the proposal, telling the U.S. House Committee on Ways and Means Subcommittee on Select Revenue that the U.S. corporate income tax rate is tied for the highest rate among all developed countries of the Organization for Economic Cooperation and Development -- and that weakens the competitiveness of U.S. companies and impacts their ability to grow and create jobs. "If U.S. corporations are to remain competitive with foreign-headquartered firms, they cannot be subject to corporate tax rates that are 10 percentage points or more higher than those of their competitors. "Current U.S. tax policy is handicapping our economic prowess at a time when it needs to be unleashed," he said. "For U.S. companies to compete successfully and bolster U.S. growth, we need a tax system that doesn't handicap us from the starting line." Lowell Williams, executive director for global HR services at Houston-based consultancy EquaTerra, says Obama's proposal, if passed, will lead to "an overall net effect of reducing direct investment abroad," especially in the manufacturing sector. He says that, as a result of corporate treasurers not being able to move money to offshore companies the way they want to, it will mean that it will be more effective for a company to sell its foreign manufacturing plants off and then contract the work out. "What that means, practically, is that there will be less U.S. people managing people overseas, and there will be less direct oversight of manufacturing overseas," he says. For HR, the effect will be most clearly shown in the reduced number of expats and contract managers who are used to manage offshore operations, he says. That number is being reduced over time anyway as markets become more global, "so it's just more of the same." Larry Harding, president and founder of Boston-based international advisory firm High Street Partners, says that, despite the administration's best intentions -- to protect American workers -- the proposed changes will have "exactly the opposite effect." "The administration should instead focus its international tax energies on lowering the overall corporate income tax rate, and simplifying the code so that existing loopholes and incentives are eliminated. This strategy would make American companies more competitive in the global marketplace," he says. "And as companies succeed, they are more likely to increase hiring and generate more revenue, leading to higher tax receipts -- objectives that the new administration seems to be interested in achieving." As far as proactively preparing employees for the impact of other potential tax-law ramifications, Williams says, HR executives need to "get plugged into what's going on in Washington. Don't make contingency plans until something gets to the Senate. This is all going to change and every lobbyist in America is working on it. "Be prepared," Williams concludes, "but don't fire the bullet yet." June 22, 2009 Copyright 2009© LRP Publications |
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© Copyright 2012 LRP Publications. All rights reserved.
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