Obama plans corporate tax crackdown
Administration's proposals aim to reduce tax breaks for U.S.-based multinationals that it says gives them an unfair advantage over domestic rivals

By Jeanne Sahadi, CNNMoney.com senior writer
Last Updated: May 4, 2009: 11:13 AM ET

NEW YORK (CNNMoney.com) -- President Obama on Monday spelled out his plans to close corporate tax loopholes on U.S. multinational corporations and crack down on overseas tax havens.

The goal is to help create new jobs in the United States and make the tax code fairer.

But tax policy experts and corporate lobbyists say such measures, unless accompanied by a reduction in the corporate tax rate, will push more companies to move their operations -- and jobs - overseas to more tax friendly countries.

The White House and Treasury Department laid out three proposals that they say will eliminate the current tax advantages U.S.-based multinationals get for investing and creating jobs abroad.

Among them, reforming the "deferral" rule that lets U.S.-based multinationals take deductions on their expenses supporting overseas operations but defer paying income tax on the profits they make from their overseas operations. They only need to pay U.S. income tax on those profits if and when they bring that money back to the United States.

The administration proposes that the companies must also defer taking their deductions until their overseas profits are brought back to the country. It estimates the change would raise $60.1 billion in revenue over 10 years.

It also proposes to offer a $74.5 billion tax cut over 10 years to companies by making permanent the research and experimentation credit given to companies that do their research and development in the United States.

"That's like saying I'm going to cut off you right arm but I'm going to let you keep your driver's license. No one expected the R&E credit to go away," said Clint Stretch, managing principal for tax policy at Deloitte Tax, whose clients use the tax breaks at issue.

The current R&E credit is set to expire at the end of 2009. But typically, lawmakers have temporarily extended the credit every year.

Companies will welcome the credit being made permanent, Stretch said. But because they never expected to lose the credit, the net effect of the two proposals "is a $60 billion tax increase on U.S.-based business."

The administration also wants to make it harder for companies to "abuse" the foreign tax credit. Currently companies may claim a credit against their U.S. income taxes for taxes they paid to another country. Amending that rule would raise an estimated $43 billion over 10 years, according to the administration.

The proposed changes to the deferral and foreign tax credit rules will make for a tough sell to the business community. Republicans are all but certain to reject the proposal, but Democratic support is far from a lock, Stretch said.

Proponents of these kinds of corporate tax changes had also been expecting that the top U.S. corporate tax rate would be reduced. Most other countries have lower corporate tax rates.

The deferral and foreign tax credit changes alone are more likely to discourage companies from investing in the United States, Stretch said. But a simultaneous reduction in the corporate rate, he added, would have a better shot at creating jobs here because there wouldn't be such a stark advantage to moving operations to more tax-friendly countries.

Obama also estimated $86.5 billion could be raised over 10 years by changing so-called "check-the-box" rules. Those rules currently let companies shift income from one foreign subsidiary to another in a tax haven, thereby escaping taxation. Obama would require some foreign subsidiaries to be treated as separate corporations for U.S. tax purposes. To top of page
First Published: May 4, 2009: 11:03 AM ET