Obama Seeks to Eliminate Tax Benefits for Multinational Corporations

The Obama Administration continues to look for ways to find tax revenue and as a result, several significant tax breaks for multinational companies may be on the chopping block.  During the Bush and Clinton Administrations, it became easier for controlled foreign corporations (CFCs) to conduct financial transactions between offshore subsidiaries at much-lower effective tax rates (or in some cases, tax-free).  If Obama gets his wish, these tax breaks will not be renewed at the end of 2010 and the Joint Committee on Taxation estimates will result in an increase of $31-86.5 billion in tax revenue from 2011-2019.

The “CFC look-through” rules were originally designed to help multinational corporations simplify or organize their numerous subsidiaries without an extensive tussle with the IRS.  However, Obama is concerned that the policies provide perverse incentives for companies to create off-shore subsidiaries.  A classic example of the (ab)use of this “look-through rule” is when a company moves its profits into tax havens located in countries with low corporate taxation.  The company then borrows money from the tax haven and subsequent interest payments become tax-deductible on the U.S. side and tax-free in the tax haven.  In addition to the tax implications, Obama feels that this policy wrongly rewards companies that move operations (e.g. jobs) out of the United States.

If the tax breaks are not renewed, it would represent the biggest tax increases on American corporations in over two decades.  As public concern over the federal deficit and overall debt management continues to rise [1], Obama would love to be able to raise some tax revenue and close this loophole as a sign of responsible fiscal management.  Multinationals would need to register their foreign subsidiaries as CFCs and would no longer be able to use the “check-the-box” rules to move the money out of the hands of tax authorities.  In addition to discontinuing the look-through rules, Obama will try to limit companies’ ability to defer taxes on foreign profits ($60.1 billion) and look to eliminate abusive foreign tax credits ($43 billion).

Opponents of the proposed policies argue that without these tax policies, it places the United States at a disadvantage relative to companies that are based in other countries and which may receive more favorable tax treatment for foreign subsidiaries.  These laws currently affect companies in numerous industries, from technology to manufacturing to drug companies.  Multinational corporations have a substantial lobbying presence in Washington and will undoubtedly try to prevent the expiration of the policies.

Bloomgberg: Obama Seeks End of Corporate Tax Break to Raise $190 Billion [2]
Government Accountability Office: Comparison of the Reported Tax Liabilities of Foreign and U.S.-Controlled Corporations, 1998-2005 [3]
CongressDaily: Administration Not Expected to Extend a Break Beyond 2010 [4]

Image by Flickr user john581 [5], used under a Creative Commons license.