THE WHITE HOUSE
Office of the Press Secretary
________________________________________________________________________
FOR IMMEDIATE RELEASE May 4, 2009
There is no higher economic priority for President Obama than
creating new, well-paying jobs in the United States. Yet today, our tax
code actually provides a competitive advantage to companies that invest
and create jobs overseas compared to those that invest and create those
same jobs in the U.S. In addition, our tax system is rife with
opportunities to evade and avoid taxes through offshore tax havens:
o In 2004, the most recent year for which data is available,
U.S. multinational corporations paid about $16 billion of U.S. tax on
approximately $700 billion of foreign active earnings – an effective
U.S. tax rate of about 2.3%.
o A January 2009 GAO report found that of the 100 largest U.S. corporations, 83 have subsidiaries in tax havens.
o In the Cayman Islands, one address alone houses 18,857
corporations, very few of which have a physical presence in the islands.
o Nearly one-third of all foreign profits reported by U.S.
corporations in 2003 came from just three small, low-tax countries:
Bermuda, the Netherlands, and Ireland.
Leveling the Playing Field: Curbing Tax Havens and Removing Tax Incentives For Shifting Jobs Overseas
1) Replacing Tax Advantages for Creating Jobs Overseas With Incentives to Create Them at Home
- Reforming Deferral Rules to Curb A Tax Advantage for Investing and Reinvesting Overseas
- Closing Foreign Tax Credit Loopholes
- Using Savings To Make Permanent The Tax Credit for Investing in Research and Experimentation at Home
2) Getting Tough on Overseas Tax Havens
- Eliminating Loopholes for "Disappearing" Offshore Subsidiaries
- Cracking Down on the Abuse of Tax Havens by Individuals
- Devoting New Resources for IRS Enforcement to Help Close the International Tax Gap
Today, President Obama and Secretary Geithner are unveiling two
components of the Administration’s plan to reform our international tax
laws and improve their enforcement. First, they are calling for reforms
to ensure that our tax code does not stack the deck against job
creation here on our shores. Second, they seek to reduce the amount of
taxes lost to tax havens – either through unintended loopholes that
allow companies to legally avoid paying billions in taxes, or through
the illegal use of hidden accounts by well-off individuals. Combined
with further international tax reforms that will be unveiled in the
Administration’s full budget later in May, these initiatives would
raise $210 billion over the next 10 years. The Obama Administration
hopes to build on proposals by Senate Finance Committee Chairman Max
Baucus and House Ways and Means Chairman Charles Rangel – as well as
other leaders on this issue like Senator Carl Levin and Congressman
Lloyd Doggett – to pass bipartisan legislation over the coming months.
1. Replacing Tax Advantages for Creating Jobs Overseas With Incentives to Create Them at Home:
The Administration would raise $103.1 billion by removing tax
advantages for investing overseas, and would use a portion of those
resources to make permanent a tax credit for investment in research and
innovation within the United States.
- Reforming Deferral Rules to Curb A Tax Advantage for Investing and Reinvesting Overseas: Currently,
businesses that invest overseas can take immediate deductions on their
U.S. tax returns for expenses supporting their overseas investments but
nevertheless "defer" paying U.S. taxes on the profits they make from
those investments. As a result, U.S. taxpayer dollars are used to
provide a significant tax advantage to companies who invest overseas
relative to those who invest and create jobs at home. The Obama
Administration would reform the rules surrounding deferral so that –
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.
This provision would take effect in 2011, raising $60.1 billion from
2011 to 2019.
- Closing Foreign Tax Credit Loopholes:
Current law allows U.S. businesses that pay foreign taxes on overseas
profits to claim a credit against their U.S. taxes for the foreign
taxes paid. Some U.S. businesses use loopholes to artificially inflate
or accelerate these credits. The Administration would close these
loopholes, raising $43.0 billion from 2011 to 2019.
- Using Savings from Ending Unfair Overseas
Tax Breaks to Permanently Extend the Research and Experimentation Tax
Credit for Investment in the United States: The
Research and Experimentation Tax Credit – which provides an incentive
for businesses to invest in innovation in the United States – is
currently set to expire at the end of 2009. To provide businesses with
the certainty they need to make long-term investments in research and
innovation, the Administration proposes making the R&E tax credit
permanent, providing a tax cut of $74.5 billion over 10 years to
businesses that invest in the United States.
2. Getting Tough on Overseas Tax Havens:
The Administration’s proposal would raise a total of $95.2 billion over
the next 10 years through efforts to get tough on overseas tax havens
by:
- Eliminating Loopholes for "Disappearing" Offshore Subsidiaries: Traditionally,
U.S. companies have been required to report certain income shifted from
one foreign subsidiary to another as passive income subject to U.S.
tax. But over the past decade, so-called "check-the-box" rules have
allowed companies to make their foreign subsidiaries "disappear" for
tax purposes – permitting them to legally shift income to tax havens
and make the taxes they owe the United States disappear as well. The
Obama administration proposes to reform these rules to require certain
foreign subsidiaries to be considered as separate corporations for U.S.
tax purposes. This provision would take effect in 2011, raising $86.5
billion from 2011 to 2019.
- Cracking Down on the Abuse of Tax Havens by Individuals:
Currently, wealthy Americans can evade paying taxes by hiding their
money in offshore accounts with little fear that either the financial
institution or the country that houses their money will report them to
the IRS. In addition to initiatives taken within the G-20 to impose
sanctions on countries judged by their peers not to be adequately
implementing information exchange standards, the Obama Administration
proposes a comprehensive package of disclosure and enforcement measures
to make it more difficult for financial institutions and wealthy
individuals to evade taxes. The Administration conservatively estimates
this package would raise $8.7 billion over 10 years by:
o Withholding Taxes From Accounts At Institutions That Don’t Share Information With The United States: This
proposal requires foreign financial institutions that have dealings
with the United States to sign an agreement with the IRS to become a
"Qualified Intermediary" and share as much information about their U.S.
customers as U.S. financial institutions do, or else face the
presumption that they may be facilitating tax evasion and have taxes
withheld on payments to their customers. In addition, it would shut
down loopholes that allow QIs to claim they are complying with the law
even as they help wealthy U.S. citizens avoid paying their fair share
of taxes.
o Shifting the Burden of Proof and Increasing Penalties for Well-Off Individuals Who Seek to Abuse Tax Havens:
In addition, the Obama Administration proposes tightening the reporting
standards for overseas investments, increasing penalties and imposing
negative presumptions on individuals who fail to report foreign
accounts, and extending the statute of limitations for enforcement.
- Devoting New Resources for IRS Enforcement to Help Close the International Tax Gap: As
part of the Obama Administration’s budget, the IRS will hire nearly 800
new employees devoted to international enforcement, increasing its
ability to crack down on offshore tax avoidance.
Leveling the Playing Field: Removing Tax Incentives For Moving Jobs Overseas and Curbing Tax Havens
Backgrounder
I. Replacing Tax Advantages to Create Jobs Overseas with Incentives to Create Jobs at Home
As the first plank of its international tax reform package, the
Obama Administration intends to repeal the ability of American
companies to take deductions against their U.S. taxable income for
expenses supporting profits in low-tax jurisdictions on which they
defer paying taxes on for years and perhaps indefinitely. Combined with
closing loopholes in the foreign tax credit program, the revenues saved
will be used to make permanent the tax credit for research and
experimentation in the United States. This will be accomplished through:
1. Reforming Deferral Rules to Curb A Tax Advantage for Investing and Reinvesting Overseas
Current Law
- Companies Can Defer Paying Taxes on Overseas Profits Until Later, While Taking Tax Deductions on Their Foreign Expenses Now:
Currently, a company that invests in America has to pay immediate U.S.
taxes on its profits from that investment. But if the company instead
invests and creates jobs overseas through a foreign subsidiary, it does
not have to pay U.S. taxes on its overseas profits until those profits
are brought back to the United States, if they ever are. Yet even
though companies do not have to pay U.S. taxes on their overseas
profits today, they still get to take deductions today on their U.S.
tax returns for all of the expenses that support their overseas
investment.
- Deferral Rules Use U.S. Taxpayer Dollars to Create A Tax Advantage for Companies That Invest Abroad:
As a result, this preferential treatment uses U.S. taxpayer dollars to
provide companies with an incentive to invest overseas, giving them a
tax advantage over competitors who make the same investments to create
jobs in the United States.
Example Under Current Law:
- Suppose that two U.S. companies decided to borrow to
invest in a new factory. Company A invests that money to build its
plant in the U.S., while Company B invests overseas in a jurisdiction
with a tax rate of only 10 percent.
- Company A will be able to deduct its interest expense,
reducing its overall U.S. tax liability by 35 cents for every dollar it
pays in interest. But it will also pay a 35 percent tax rate on its
corporate profits.
- Company B will also be able to deduct its interest
expense from its U.S. tax liabilities at a 35 percent rate. But it will
only face a tax of 10 percent on its profits.
- Thus, our current tax code uses U.S. taxpayer dollars to
put companies that invest in the United States at a competitive
advantage with companies who invest overseas.
The Administration’s Proposal
- Level the Playing Field:
The Administration’s commonsense proposal, similar to an earlier
measure proposed by House Ways and Means Chairman Charles Rangel, would
level the playing field by requiring a company to defer any deductions
– such as for interest expenses associated with untaxed overseas
investment – until the company repatriates its earnings back home. In
other words, companies would only be able to take a deduction on their
U.S. taxes for foreign expenses when they also pay taxes on their
foreign profits in the United States. This proposal makes an exception
for deductions for research and experimentation because of the positive
spillover impacts of those investments on the U.S. economy.
- Raise $60.1 Billion From 2011 to 2019: This proposal goes into effect in 2011, and would raise $60.1 billion between 2011 and 2019.
2. Closing Foreign Tax Credit Loopholes
Current Law
- Companies Can Take Advantage Of Foreign Tax Credit Loopholes: When
a U.S. taxpayer has overseas income, taxes paid to the foreign
jurisdiction can generally be credited against U.S. tax liabilities.
In general, this "foreign tax credit" is available only for taxes paid
on income that is taxable in the U.S. The intended result is that U.S.
taxpayers with overseas income should pay no more tax on their U.S.
taxable income than they would if it was all from U.S. sources.
However, current rules and tax planning strategies make it possible to
claim foreign tax credits for taxes paid on foreign income that is not
subject to current U.S. tax. As a result, companies are able to use
such credits to pay less tax on their U.S. taxable income than they
would if it was all from U.S. sources – providing them with a
competitive advantage over companies that invest in the United States.
The Administration’s Proposal
- Reform the Foreign Tax Credit to Remove Unfair Tax Advantages for Overseas Investment:
The Administration’s proposal would take two steps to rein in foreign
tax credit schemes. First, a taxpayer’s foreign tax credit would be
determined based on the amount of total foreign tax the taxpayer
actually pays on its total foreign earnings. Second, a foreign tax
credit would no longer be allowed for foreign taxes paid on income not
subject to U.S. tax. These reforms would go into effect in 2011,
raising $43.0 billion from 2011 to 2019.
3. Making R&E Tax Credit Permanent to Encourage Investment in Innovation in the United States:
The resources saved by curbing tax incentives for jobs overseas and
limiting losses to tax havens would be used to strengthen incentives to
invest in jobs in the United States by making permanent the R&E tax
credit.
Current Law
- R&E Credit Is Set to Expire At End of 2009: Under
current law, companies are eligible for a tax credit equal to 20
percent of qualified research expenses above a base amount. But the
research and experimentation tax credit has never been made permanent –
instead, it has been extended on a temporary basis 13 times since it
was first created in 1981 – and is set to expire on December 31, 2009.
How It Works
- Through the research and experimentation tax credit,
companies receive a credit valued at 20 percent of qualified research
expenses in the United States above a base amount. Taxpayers can also
elect to take an alternative simplified research credit that provides
an incentive for increasing research expenses above the level of the
previous three years. Taxpayers may also take a credit based on
spending on basic research and certain energy research.
- Any uncertainty about whether the R&E credit will be
extended reduces its effectiveness in stimulating investments in new
innovation, as it becomes more difficult for taxpayers to factor the
credit into decisions to invest in research projects that will not be
initiated or completed prior to the credit’s expiration.
The Administration’s Proposal
- Create Certainty to Encourage New
Investment and Innovation at Home By Making the Research and
Experimentation Tax Credit Permanent: To give
companies the certainty they need to make long-term research and
experimentation investment in the U.S., the Administration’s budget
includes the full cost of making the R&E credit permanent in future
years. By making this tax credit permanent, businesses would be
provided with the greater confidence they need to initiate new research
projects that will improve productivity, raise standards of living, and
increase our competitiveness. And with over 75 percent of credit
dollars attributed to wages, the credit would provide an important
incentive for businesses to create new jobs.
- Paid For With Provisions That Make the Tax Code More Efficient and Fair: This
change would cost $74.5 billion over 10 years, which will be paid for
by reforming the treatment of deferred income and the use of the
foreign tax credit.
II. Getting Tough on Overseas Tax Havens
Some countries make it easy for U.S. taxpayers to evade or avoid
U.S. taxes by withholding information about U.S.-held accounts or
giving favorable tax treatment to shell corporations created just to
avoid taxes. In certain cases, companies are taking advantage of
currently legal loopholes to avoid paying taxes by shifting their
profits to tax havens. In other cases, Americans break the law by
hiding their income in hidden overseas accounts, and these tax havens
refuse to provide the information the IRS needs to enforce U.S. law.
Either way, these tax havens make our tax system less fair and harm the
U.S. economy. President Obama proposes to address tax havens by:
1. Eliminating Loopholes that Allow "Disappearing" Offshore Subsidiaries:
Current law allows U.S. businesses to establish foreign subsidiary
corporations, but then to "check a box" to pretend that the
subsidiaries do not exist for U.S. tax purposes. This practice allows
taxes that would otherwise be paid in the U.S. on passive income to be
avoided, at great cost to U.S. taxpayers.
Current Law
- Disappearing Subsidiaries Allow Corporations to Shift Income Tax-Free: Traditionally,
if a U.S. company sets up a foreign subsidiary in a tax haven and one
in another country, income shifted between the two subsidiaries (for
example, through interest on loans) would be considered "passive
income" for the U.S. company and subject to U.S. tax. Over the last
decade, so-called "check-the box" rules have allowed U.S. firms to make
these subsidiaries disappear for U.S. tax purposes. With the separate
subsidiaries disregarded, the firm can shift income among them without
reporting any passive income or paying any U.S. tax. As a result, U.S.
firms that invest overseas are able to shift their income to tax
havens. It is clear that this loophole, while legal, has become a
reason to shift billions of dollars in investments from the U.S. to
other counties.
Example under Current Law
- Suppose that a U.S. company invests $10 million to build
a new factory in Germany. At the same time, it sets up three new
corporations. The first is a wholly owned Cayman Islands holding
company. The second is a corporation in Germany, which is owned by the
holding company and owns the factory. The third is a Cayman Islands
subsidiary, also owned by the Cayman Islands holding company.
- The Cayman subsidiary makes a loan to the German
subsidiary. The interest on the loan is income to the Cayman
subsidiary and a deductible expense for the German subsidiary. In this
way, income is shifted from higher-tax Germany to the no-tax Cayman
Islands.
- Under traditional U.S. tax law, this income shift would
count as passive income for the U.S. parent – which would have to pay
taxes on it. But "check the box" rules allow the firm to make the two
subsidiaries disappear — and the income shift with them. As a result,
the firm is able to avoid both U.S. taxes and German taxes on its
profits.
The Administration’s Proposal
- Require U.S. Businesses That Establish Certain Foreign Corporations To Treat Them As Corporations For U.S. Tax Purposes:
The Administration’s proposal seeks to abolish a range of tax-avoidance
techniques by requiring U.S. businesses that establish certain
corporations overseas to report them as corporations on their U.S. tax
returns. As a result, U.S. firms that invest overseas would no longer
be able to make their subsidiaries — or their income shifts to tax
havens — disappear for tax purposes. This would level the playing
field between firms that invest overseas and those that invest at home.
- Raise $86.5 Billion from 2011 to 2019: This loophole would be closed beginning in 2011, raising $86.5 billion from 2011 to 2019.
2. Cracking Down on the Abuse of Tax Havens by Individuals: The
IRS is already engaged in significant efforts to track down and collect
taxes from individuals illegally hiding income overseas. But to fully
follow through on this effort, it will need new legal authorities.
Current law makes it difficult for the IRS to collect the information
it needs to determine that the holder of a foreign bank account is a
U.S. citizen evading taxation. The Obama administration proposes
changes that will enhance information reporting, increase tax
withholding, strengthen penalties, and shift the burden of proof to
make it harder for foreign account-holders to evade U.S. taxes, while
also providing the enforcement tools necessary to crack down on tax
haven abuse.
Current Law
- A Free Ride for Financial Institutions that Flout Reporting Rules:
A centerpiece of the current U.S. regime to combat international tax
evasion is the Qualified Intermediary (QI) program, under which
financial institutions sign an agreement to share information about
their U.S. customers with the IRS. Unfortunately, this regime, while
effective, has become subject to abuse:
o At Non-Qualifying Institutions, Withholding Requirements Are Easy to Escape:
Currently, an investor can escape withholding requirements by simply
attesting to being a non-U.S. person. That leaves it to the IRS to show
that the investor is actually a U.S. citizen evading the law.
o Loopholes Allow Qualifying Institutions to Still Serve as Conduits for Evasion: Moreover,
financial institutions can qualify as QIs even if they are affiliated
with non-QIs. As a result, a financial institution need not give up its
business as a conduit for tax evasion in order to enjoy the benefits of
being a QI. In addition, QIs are not currently required to report the
foreign income of their U.S. customers, so U.S. customers may hide
behind foreign entities to evade taxes through QIs.
o Legal Presumptions Favor Tax Evaders Who Conceal Transactions:
U.S. investors overseas are required to file the Foreign Bank and
Financial Account Report, or FBAR, disclosing ownership of financial
accounts in a foreign country containing over $10,000. The FBAR is
particularly important in the case of investors who employ non-QIs,
because their transactions are less likely to be disclosed otherwise.
Unfortunately, current rules make it difficult to catch those who are
supposed to file the FBAR but do not. And even when the IRS has
evidence that a U.S. taxpayer has a foreign account, legal presumptions
currently favor the tax evader — without specific evidence that the U.S
person has an account that requires an FBAR, the IRS cannot compel an
investor to provide the report or impose penalties for the failure to
do so. This specific evidence may be almost impossible for the IRS to
get.
- The IRS Lacks the Tools It Needs to Enforce International Tax Laws:
In addition to the shortcomings of the QI program, current law features
inadequate tools to crack down on wealthy taxpayers who evade taxation.
Investors who withhold information about overseas investments face
penalties limited to 20 percent of the amount of the understatement.
The statute of limitations for enforcement is typically only three
years – which is often too short a time period for the IRS to get the
information it needs to determine whether a taxpayer with an offshore
account paid the right amount of tax. And there are no requirements
that U.S. individuals or third parties report transfers to and from
foreign accounts, limiting the ability of the IRS to determine whether
taxpayers are paying what they owe.
Example Under Current Law
- Through a U.S. broker, a U.S. account-holder at a non-qualified intermediary sells $50 million worth of securities.
- If the seller self-certifies that he is not a U.S.
citizen and the non-qualified intermediary simply passes that
information along to the U.S. broker, the broker may rely on that
statement and does not need to withhold money from the transaction.
- As a result, a U.S. taxpayer who provides a false
self-certification can easily avoid paying taxes, since the non-QI has
not signed an agreement with the IRS, and the IRS may have limited
tools to detect any wrongdoing.
Proposal
In addition to initiatives taken within the G-20 to impose sanctions
on countries judged by their peers not to be adequately implementing
information exchange standards, the Obama administration proposes to
make it more difficult to shelter foreign investments from taxation by
cracking down on financial institutions that enable and profit from
international tax evasion. These measures – expected to raise $8.7
billion over 10 years – would:
- Strengthen the "Qualified Intermediary" System to Crack Down on Tax Evaders:
The core of the Obama Administration’s proposals is a tough new stance
on investors who use financial institutions that do not agree to be
Qualifying Intermediaries. Under this proposal, the assumption will be
that these institutions are facilitating tax evasion, and the burden of
proof will be shifted to the institutions and their account-holders to
prove they are not sheltering income from U.S. taxation. As a result,
the Administration proposes to:
- Impose Significant Tax Withholding On Transactions Involving Non-Qualifying Intermediaries: The
Administration’s plan would require U.S. financial institutions to
withhold 20 percent to 30 percent of U.S. payments to individuals who
use non-QIs. To get a refund for the amount withheld, investors must
disclose their identities and demonstrate that they’re obeying the law.
- Create A Legal Presumption Against Users Of Non-Qualifying Intermediaries:
The Administration’s plan would create rebuttable evidentiary
presumptions that any foreign bank, brokerage, or other financial
account held by a U.S. citizen at a non-QI contains enough funds to
require that an FBAR be filed, and that any failure to file an FBAR is
willful if an account at a non-QI has a balance of greater than
$200,000 at any point during the calendar year. These presumptions will
make it easier for the IRS to demand information and pursue cases
against international tax evaders. This shifting of legal presumptions
is a key component of the anti-tax haven legislation long championed by
Senator Carl Levin.
- Limit QI Affiliations With Non-QIs:
The Administration’s plan would give the Treasury Department authority
to issue regulations requiring that a financial institution may be a QI
only if all commonly-controlled financial institutions are also QIs.
As a result, financial firms couldn’t benefit from siphoning business
from their legitimate QI operations to illegitimate non-QI affiliates.
- Provide the IRS With The Legal Tools Necessary to Prosecute International Tax Evasion: The
Obama administration proposes to improve the ability of the IRS to
successfully prosecute international tax evasion through the following
steps:
- Increase Penalties for Failing to Report Overseas Investments:
The Administration’s plan would double certain penalties when a
taxpayer fails to make a required disclosure of foreign financial
accounts.
- Extend the Statute of Limitations for International Tax Enforcement:
The Administration’s plan would set the statute of limitations on
international tax enforcement at six years after the taxpayer submits
required information.
- Tighten Lax Reporting Requirements:
The Administration’s plan would increase the reporting requirement on
international investors and financial institutions, especially QIs.
QIs would be required to report information on their U.S. customers to
the same extent that U.S. financial intermediaries must. And U.S.
customers at QIs would no longer be allowed to hide behind foreign
entities. U.S. investors would be required to report transfers of
money or property made to or from non-QI foreign financial institutions
on their income tax returns. Financial institutions would face
enhanced information reporting requirements for transactions that
establish a foreign business entity or transfer assets to and from
foreign financial accounts on behalf of U.S. individuals.
3. Hire Nearly 800 New IRS Staff to Increase International Enforcement:
As part of the President’s budget, the IRS would be provided with funds
to support the hiring of nearly 800 new employees devoted specifically
to international enforcement. The funding would allow the IRS to hire
new agents, economists, lawyers and specialists, increasing the IRS’
ability to crack down on offshore tax avoidance and evasion, including
through transfer pricing and financial products and transactions such
as purported securities loans. According to estimates by the IRS, every
additional dollar invested in enforcement in recent years has yielded
about four dollars in added tax revenues.
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