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Dodging the issue: Obama's attack on offshore cash
The debate around US based multinationals holding cash reserves offshore, in low-tax jurisdictions such as Luxembourg and Ireland, has again been brought to the fore by the US government as their ongoing frustration at this practice has finally mobilised Obama into action. And while one can understand the frustration of US tax policy makers in the actions of multinationals, the proper response would be to address the underlying weaknesses in the US tax system.
In Obama’s budget proposal, announced today, he plans to raise $238 billion by levying a one-off 14% “transition” tax on the cash piles held by US companies overseas as well as a 19% tax on any future profits as they are earned. This extra capital would go towards funding nearly half of a six year infrastructure programme to rebuild highways and bridges. Not for the first time, tax repatriation is being used as a means to fund government initiatives and fill a portion of the budgetary deficit.
But this move ignores the crux of the issue. The primary reason for multinationals choosing toedefer repatriation of foreign sourced profits is not because of their ‘unpatriotic’ nature, as deemed by Obama, but because their profits will be slapped with a corporate tax rate of up to 35% if they were to bring these funds back home; one of the highest corporate tax rates in the world.
Therefore, instead of positively encouraging US firms to send profits back home or to even relocate their operations back to US soil by cutting the corporate tax rate, they have instead levied further taxes. This response by US regulators is at odds with other countries across the globe, which are looking to attract these companies to boost their economies and subsequently - this “transition” tax will only exacerbate the uncompetitive nature of the US tax system.
In many ways the US is lacking self-awareness and is avoiding a major policy issue by failing to recognise that its tax competitiveness is significantly lagging behind other major global economies.
Obama’s proposal today of a “transition tax” reignites the discussion as to where multinationals’ duties lie. Whilst tax obligations to the country of domicile cannot be ignored, the primary aim must be to create returns for their shareholders whilst also focusing on ethical obligations to employ cash so as to maintain and create jobs. The strategic deployment of cash to support overseas expansion is very much in line with this.
It is an imperative for the US to enter the wider debate around the need for broad based tax reform. This would include a significant reform of its corporate tax system, which is rife with “tax preferences” which should be eliminated or at least reduced, allowing for a lower corporate tax rate without a reduction in government revenues. A lower corporate tax rate would be the most efficient and effective inducement for the repatriation of foreign corporate earnings. But such a tax reform debate would also include consideration of a European style value added tax or VAT, widely regarded as the least harmful and distortive of taxes. Say what one will about the brief presidential aspiration of Herman Cain and his famous “nine, nine, nine” tax proposals, at least he had put these topics into public debate during his aborted run in 2012 for the Republican presidential nomination.
Tim Wach, Global Managing Director of Taxand
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