Obama proposes crackdown on corporate tax avoidance
US President Barack Obama announced, on 4 May 2009, proposals designed to "level the playing field" by tightening up the system that allows US multinationals to defer paying US taxes on profits made on overseas investments. Under the reforms, multinationals would no longer be able to claim tax deductions on most foreign expenses, such as interest costs, until they repatriate earnings.
The reforms, which are likely to be included in this year's Budget, would also close loopholes that allow businesses to inflate tax credits for foreign taxes that can be deducted against US tax bills, and reform the "check the box" rules that allow entities to elect whether to be taxed as corporations or partnerships.
The administration estimated that US companies paid an effective tax rate of just 2.3% on the $700 billion they earned in foreign profits in 2004. It also highlighted Ireland, the Netherlands and Bermuda as examples of how distorting existing tax policies are, saying the three accounted for more than a third of US foreign profits in 2003.
The moves are also likely to be felt in Luxembourg, Switzerland and Singapore where profits reported by US subsidiaries appear disproportionately high for the size of these jurisdictions. Critics of the proposed reforms said the move would impede US multinationals' ability to compete abroad, as most other countries exempt foreign profits from tax.
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