U.S. proposes minimum tax for overseas subsidiaries

The face of the joint Framework report

President Barack Obama’s proposed revision of the U.S. Internal Revenue code would subject subsidiaries of U.S. corporations operating abroad to a minimum tax.

“This would stop our tax system from generously rewarding companies for moving profits offshore,” said the Framework for business Tax Reform released by the White House.

The proposal has relevance in Costa Rica where many subsidiaries of U.S. firms are located.

Foreign income deferred in a low-tax jurisdiction would be subject to immediate U.S. taxation up to the minimum tax rate with a foreign tax credit allowed for income taxes on that income paid to the host country, according to the proposal. The minimum tax rate was not specified.

The president’s proposal would end tax deductions for U.S. companies that move productions overseas and provide new incentives for bringing production back to the United States, the Framework said.

The president’s proposal is to give a 20 percent income tax credit for the expenses of moving operations back into the United States. He suggested some kind of advantage for firms that do this but did not clarify in his State of the Union Address.

The current U.S. tax code allows companies to deduct interest expenses for borrowing and investing overseas even if they pay little or no U.S. taxes, the Framework notes. Obama wanted to eliminate this practice.

“Our tax system should not give companies an incentive to locate production overseas or engage in accounting games to shift profits abroad, eroding the U.S. tax base. Introducing a minimum tax on foreign earnings would help address these problems and discourage a global race to the bottom in tax rates.” said the Framework.

Obama aims to cut the U.S. corporate tax rate from 35 to 28 percent, while eliminating dozens of tax-saving deductions American companies now enjoy.

Treasury Secretary Timothy Geithner unveiled the tax overhaul Wednesday, two days before a tax proposal being offered by one-time venture capitalist Mitt Romney. He is one of the leading Republican presidential contenders seeking his party’s nomination to face Obama, a Democrat, in next November’s national election.

Government officials said the plan would cut the effective tax rate for manufacturing firms from the current 32 percent average to 25 percent.  But the proposal would raise taxes on oil and natural gas companies.

The top U.S. corporate rate of 35 percent is among the highest in the world, putting American firms at an economic disadvantage.  But numerous U.S. corporations, after taking allowable deductions for business expenses, often pay at a substantially lower rate, and occasionally, nothing.

The Framework also discusses the advantage of a Subchapter S corporation where any profits are passed without tax to the shareholders. Although there is no specific mention of a plan to end this type of corporate structure, the Framework characterized as a distortion the difference between this time of firm and a typical corporation that pays taxes before distributing dividends.

The Framework document is clearly a political one. It is filled with words like loophole, distortions and subsidies.

The conservative Heritage Foundation quickly issued a lengthy critical commentary.

“The vision Obama outlines is to punish firms that outsource jobs and incentivize ‘insourcing,’” said the column by J.D. Foster. “The net effect, however, would be quite different. The net effect is to put a ‘for sale’ sign on every profitable U.S. multinational company. The buyers, however, won’t be U.S. companies. The buyers will all be foreign companies.”

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