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Monday, May 4, 2009

Will President Obama's International Tax Reform Proposal Move Us Into the 21st Century?

Today, the White House announced details of its cryptic 2/09 budget proposal that included a “robust portfolio of IRS international tax compliance initiatives” that would generate $210 billion over 10 years.

The Administration aims to "curb tax havens and replace tax advantages for creating jobs overseas with incentives to create them here at home." President Obama describes these changes as a start in simplifying the tax law and making it more fair. Specific elements of the plan include:
  • Deferral reform: "with the exception of research and experimentation expenses – companies cannot receive deductions on their U.S. tax returns supporting their offshore investments until they pay taxes on their offshore profits. "
  • Modify the "check the box" rules to "require certain foreign subsidiaries to be considered as separate corporations for U.S. tax purposes."
  • Tax havens: "a comprehensive package of disclosure and enforcement measures to make it more difficult for financial institutions and wealthy individuals to evade taxes." Reporting requirements would be tightened, penalties increased and the statute of limitations would be extended. In addition, 800 new revenue agents would be hired to help with international enforcement.
  • Make the research tax credit permanent.

Further details are in a "fact sheet." Additional international tax reforms will be issued in May.

Today's announcement also states: "it will take time to undo the damage of distorted provisions that were slipped into our tax code by lobbyists and special interests." This seems like an odd and unfortunate way to describe how tax laws are enacted - isn't Congress responsible for what gets passed in the House and Senate.

Will these proposals move the US tax system into the 21st century ways of doing business? I don't think it is enough. The issues noted are not new ones. The tax haven one has been around for at least 50 years (see short article that notes that). It is way past time to resolve this matter that contributes to the tax gap and is not all included in the $345 billion tax gap figure we always hear of.

US companies have a variety of reasons to have offshore operations beyond tax benefits. I'd like to see discussion of a territorial tax system like many countries already use, perhaps consideration of some type of consumption tax for businesses that would tax imports but not exports, and a lowering of the tax rate. US businesses seem somewhat disadvantaged in competing against companies located in other industrialized countries because our system is taxing worldwide income and at higher rates.

What do you think would be the best international and domestic business tax reforms that would help US businesses to compete in the global economy and strengthen the US economy?

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