US president Barack Obama’s crackdown on offshore tax avoidance by US companies has prompted concerns that the new proposals will put US companies at a disadvantage over foreign rivals.

President Obama’s proposed regulation change will involve closing the loophole that enables companies to avoid US and foreign taxes by shifting income to subsidiaries based in offshore tax havens.

Advertisement

The president says the changes to the tax regime will raise $210bn over 10 years and will create almost 800 new jobs at the Internal Revenue Service, which will enforce the new regulations.

President Obama cited the example of a building in the Cayman Islands, where more than 18,000 US companies are housed. “Either this is the biggest building in the world or it is the biggest tax scam in the world,” he said. The administration says more than one-third of US foreign profits in 2003 came from Bermuda, the Netherlands and Ireland. It also estimates that US companies paid an effective tax rate of just 2.3% on the $700bn they earned in foreign profits in 2004.

However, industry groups in the US have described the move as ‘disastrous’ for corporate America. John Castellani, Business Roundtable president, said: “It will cripple growth, reduce the competitiveness of US companies overseas and destroy jobs.”

Martin Regalia, chief economist for the US Chamber of Commerce in Washington, DC, underlined that the current tax allowance is legal.

He said that the allowance represented a long-standing arrangement that let US multinationals compete with foreign multinationals which operate under territorial rather than universal tax laws. He also warned that President Obama’s proposed reforms would impede US multinationals’ ability to compete abroad, as most other countries exempt foreign profits from tax.

Mr Regalia went on to warn that the proposals would make US multinationals more vulnerable to takeover by foreign competitors, claiming they could buy US firms and immediately reassert their tax advantage because they would become a foreign subsidiary of a parent company operating in a territorial system. “We saw a similar situation when deferral provisions for shipping lines were removed in the 1990s and more and more of our shipping companies moved their headquarters to places such as Liberia, essentially becoming foreign-flag vessels,” he said.

Find out more about