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Obama closer to Republicans on revamp of business taxation

Tuesday, February 3, 2015 - 07:43
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President Barack Obama's latest budget plan narrows the gap between the two parties on US business taxes, offering the glimmer of a potential agreement.

[WASHINGTON] President Barack Obama's latest budget plan narrows the gap between the two parties on US business taxes, offering the glimmer of a potential agreement.

His proposal would require US companies to pay taxes on foreign income, though lower than what they pay at home, and give them the freedom to bring profits home whenever they want. It would also aim to create simpler accounting rules for small businesses.

Obama's moves to tax US companies' offshore profits aren't as aggressive as his campaign promises and reduce the number of disputed areas with Republicans. The parties are still divided on which business tax breaks should be curtailed, how much revenue should come from corporate taxes, and the treatment of businesses that pay taxes through their owners' individual tax returns.

"We want to go and see if there's common ground," Republican Rep. Paul Ryan, chairman of the House Ways and Means Committee, said Sunday on NBC's "Meet the Press." "And so we want to work with this administration to see if we can find common ground on certain aspects of tax reform. And we want to exhaust that possibility." Companies including Alcoa, Caterpillar, Cisco Systems and Bank of America have been urging Congress to lower tax rates on foreign profits and let them bring money home without an extra layer of US taxes. They are members of the Alliance for Competitive Taxation.

Obama also is pushing the parties further apart on taxation of individuals. His budget plan layers new taxes - higher levies on capital gains and people who die with appreciated assets - on top of previous ideas that Congress has repeatedly ignored.

Administration officials have been emphasizing the potential overlap between the parties on business taxation, because lawmakers in both parties favor cutting the 35 per cent top corporate rate - the industrialised world's highest - and curbing business breaks.

"The president's budget proposal takes direct aim at two of the nation's most pressing challenges, addressing an international tax system that encourages corporations to keep profits offshore rather than creating jobs in the US, and providing desperately needed revenue for our nation's crumbling infrastructure," Rep. Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee, said in a statement.

Obama's latest international tax plan represents a departure from his campaign rhetoric - and yet it's not exactly what major corporations had in mind.

The proposal would impose a 19 per cent minimum tax on US companies' foreign earnings, which would mean a tax increase for technology and pharmaceutical companies that have been booking profits in low-tax and no-tax jurisdictions for years.

The 19 per cent rate would be a discount from the new rate on domestic profits under Obama's plan - 28 percent for most companies and 25 per cent for US manufacturers. And it is different from Obama's early budget proposals, which would have retained the tax upon repatriation and made it tougher for US companies to defer taxes on foreign profits.

The latest Obama plan would include new rules to prevent companies from shifting domestic profits outside the US and limits to keep them from changing their addresses for tax purposes through transactions known as inversions.

Companies would face a 14 per cent one-time tax on about US$2 trillion they have stockpiled overseas under the current system, which provides incentives to shift profits overseas and leave them there to avoid a US tax upon repatriation.

Companies with profits parked overseas include Apple Inc, Google Inc and Microsoft Corp, which holds US$92.9 billion in profits outside the US. If that money were brought home, the company would owe US$29.6 billion in US taxes - or a 31.9 per cent rate.

The revenue from the one-time tax - US$248 billion over five years - would be used for an infrastructure program.

"It's really an attempt to balance the need to make sure we're not eroding our tax base, but also to make sure our companies are competitive as they operate around the world," Jason Furman, chairman of Obama's Council of Economic Advisers, said Monday on CNBC.

Last year, House Ways and Means Committee Chairman Dave Camp, who retired in January, offered a similar proposal that also included a one-time tax on stockpiled profits and rules to prevent US companies from shifting future profits overseas. His proposed tax rates were more favorable to companies.

Timothy Karpoff, a former US Treasury official and now a partner at Jenner & Block LLP, said in an e-mail that Obama's proposed one-time tax is similar to Camp's plan although they had different rates.

Because the president's plan would continue to treat profits earned overseas differently from those earned in the US, there still would be incentives for "complex tax structuring transactions" to reduce companies' tax bills, Karpoff said.

The two parties are still divided on the taxation of businesses known as pass-throughs, those that pay taxes through their owners' individual returns. That includes small businesses including corner stores and dry cleaners and large global businesses such as Ernst & Young LLP.

The administration has focused on offering benefits to small businesses, such as faster write-offs of capital expenses. The budget plan released Monday would let businesses with receipts of up to US$25 million use cash accounting, up from the US$10 million threshold Obama proposed in 2012.

Republicans in Congress would rather cut both the individual and corporate tax rates so businesses pay the same top rate regardless of how they're organized. They haven't yet proposed a plan that would address the issue if Congress only focuses on business taxation.