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Obama targets foreign profits with tax proposal, Republicans skeptical

WASHINGTON (Reuters) – President Barack Obama’s fiscal 2016 budget will seek new taxes on trillions of dollars in profits accumulated overseas by U.S. companies, and a new approach to taxing foreign profits in the future, but Republicans were skeptical of the plan on Sunday.

Reviving a long-running debate about corporate tax avoidance, Obama will target a loophole that lets companies pay no tax on earnings held abroad, the White House said. But his proposal was certain to encounter stiff resistance from Republicans.

In his budget plan to be unveiled on Monday, Obama will call for a one-time, 14 percent tax on an estimated $2.1 trillion in profits piled up abroad over the years by multinationals such as General Electric, Microsoft, Pfizer Inc and Apple Inc.

He will also seek to impose a 19 percent tax on U.S. companies’ future foreign earnings, the White House said.

At present, those earnings are supposed to be taxed at a 35-percent rate, but many companies avoid that through the loophole that defers taxation on active income that is not brought into the United States, or repatriated.

The $238 billion raised from the one-time tax would fund repairs and improvements to roads, bridges, transit systems and freight networks that would replenish the Highway Trust Fund as part of a $478 billion package, the White House said.

The annual budget proposal is as much a political document as a fiscal roadmap, requiring approval from Congress. Given Washington’s current political division, much of what will be laid out on Monday is unlikely to become law.

Obama’s budget will set a spending target of $4 trillion for fiscal year 2016, including a $474 billion deficit, which would represent a manageable 2.5 percent of U.S. Gross Domestic Product, The New York Times reported on Sunday. The budget also includes $105 million for “trade adjustment assistance” to help workers who have been affected by free trade pacts, it said.

Obama’s latest tax proposals are part of a broad tax reform package that he says is meant to help middle-income Americans.

‘ENVY ECONOMICS’

On proposed tax increases for the wealthy and large companies that are part of that package, Paul Ryan, the top Republican tax writer in the House of Representatives, said on NBC’s “Meet the Press”: “What I think the president is trying to do here is to, again, exploit envy economics.”

Republicans, who took control of the Senate and boosted their House majority after November’s congressional elections, have said tax reform is one area where they hope to find compromises with Democrats and the White House, although Obama’s proposals have so far received a lukewarm reception.

On the foreign profits proposal specifically, Ryan aide Brendan Buck said in an emailed reply to questions that tax reform should be about simplifying the code and lowering rates.

“If that’s the approach the administration is willing to take, there may be room to find common ground,” he said.

“There won’t be, however, if the president instead tries to sock American businesses with big tax hikes just to increase spending and add even more complexity to the code.”

Tax reform has eluded Washington for decades. There has been renewed talk about it this year, but consensus is still far from evident. Obama has already offered to cut the corporate income tax, but he wants to offset the revenue losses that would result by closing loopholes. Republican proposals have varied, while generally seeking deeper cuts in the rate and fewer loophole closings.

The White House said that under the new approach to foreign earnings companies would have to pay a 19 percent tax on all foreign earnings as they earn them, while continuing to get tax credits for foreign taxes paid. After this payment, foreign earnings could be reinvested in the United States without added tax.

The president’s proposal also includes cracking down on corporations that shift profits to tax havens to avoid paying their fair share or undertake “inversion” deals in which they reincorporate abroad to avoid paying U.S. taxes.

The one-time tax “would mean that companies have to pay U.S. tax right now on the $2 trillion they already have overseas, rather than being able to delay paying any U.S. tax indefinitely,” a White House official said.

“Unlike a voluntary repatriation holiday, which the president opposes and which would lose revenue, the president’s proposed transition tax is a one-time, mandatory tax on previously untaxed foreign earnings, regardless of whether the earnings are repatriated.”

Corporations have been pushing for years for a tax holiday that would let them repatriate such earnings at a discounted tax rate. This was tried in 2004 under former Republican President George W. Bush. Framed as an economic stimulus, the Bush measure did result in a substantial portion of deferred profits being repatriated, but studies showed it did little for the economy.

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