President Obama has recently laid out his plans for international tax reform. Long perceived as the most abused section of the tax code, the proposals seek to raise $210 billion over the next 10 years. One of the stated goals of the tax reforms is to ensure that the tax code does not stack the deck against job creation in the US.

President Obama also announced reforms directed at US companies doing business abroad. The proposals seek to encourage domestic investment and jobs by removing tax benefits of operating abroad. Their implementation is much less clear however.

President Obama’s proposals focus on unfair tax deferrals and tax loopholes which provide “significant tax advantage to companies who invest overseas”. Currently US companies who invest abroad using foreign corporations are generally able to defer US taxation on profits until they are repatriated to the US. They can, however, take deductions on their US tax return for ongoing costs of the overseas investment, resulting in an effective deferral of US tax. Like previous measures proposed by the House Ways and Means Committee, this proposal would deny deductions (other than research and experimentation) until such foreign profits were repatriated.

Other tax abuses this administration hopes to crack down on include foreign tax credit loopholes and loopholes created by the generous check-the-box regulations. Proposals will curb the foreign tax credit to actual taxes paid by a foreign corporation in a tax year and on income that is subject to US tax. In addition, check-the-box elections which effectively allow taxable income and tax rates across countries to be blended when included on the US tax return of a multinational would also be targeted. Unlike the denial of a tax deduction, the method for closing these loopholes is not yet clear. While directed at US corporations with overseas activity, implementation of any changes could have much more far reaching affects for small businesses and entrepreneurs by limiting the flexibility previously afforded.

Further details will be released when the Budget is announced, but these proposals are already facing strong opposition from the business community who say that further restrictions on US companies operating abroad will only hurt economic growth that legislators are so desperate to create. Instead of making it “more profitable for companies to create jobs here in the United States” as the President claims, business leaders say that these proposals would merely result in higher tax liabilities for those companies with foreign operations, further reducing the competitiveness of US corporations who already face one of the highest corporate tax rates in the world.

The ultimate reform of the tax code will likely change dramatically from this month’s proposals, but the announcement is a strong indication of the new administration’s state of mind. While targeting wealthy Americans and US multinationals “cheating” the tax system, the changes will inevitably increase the challenges and tax reporting burdens facing all Americans investing or operating abroad.

Contacts:

Mark Walters, Frank Hirth: +44 (0)20 7883 3500 This e-mail address is being protected from spambots. You need JavaScript enabled to view it

www.frankhirth.com