Tuesday 12 December 2017

Microsoft and HP among firms to take on Obama over $15bn offshore loophole

The US economy is showing stronger signs of recovery under policies introduced by President Barack Obama and Vice President Joe Biden
The US economy is showing stronger signs of recovery under policies introduced by President Barack Obama and Vice President Joe Biden

Some of the biggest multinationals operating here, such as Microsoft and Hewlett-Packard, are gearing up to fight an Obama administration plan to curb offshore tax avoidance.

The $15.5bn (€11.3bn) proposal in US President Barack Obama's 2011 budget targets what the IRS calls the growing problem of so-called transfer pricing. The technique allows companies to reduce their tax bills by transferring intangible property such as patents, trademarks and licenses to offshore subsidiaries.

The Business Software Alliance (BSA), a Washington-based trade group that represents technology companies, said it would "educate policymakers" on how the proposal would hurt US companies, jobs and the economy.

"The transfer tax on intangibles, which regulates how expenses and profits from overseas subsidiaries are recognised and taxed, would unfairly punish American firms vis-a-vis their foreign competitors," BSA chairman Robert Holleyman said in a statement.

"The US software industry and many other US businesses would pay a steep price in terms of global competitiveness."

While the proposal represents less than 4pc of the $400bn in business tax increases in the budget plan, the debate indicates that firms are likely to resist Mr Obama's efforts to raise their taxes to narrow estimated deficits of $8.5tn over 10 years.

In the past, politicians have been willing to take on offshore tax-avoidance techniques, though Senate finance committee chairman Max Baucus, a Democrat, has said he would prefer to change such rules in the context of a broader tax-code overhaul.



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Corporations engage in transfer pricing when they sell goods or services between subsidiaries.

A globally accepted set of practices is meant to ensure that goods are priced so companies don't inflate deductible expenses in high-tax countries and taxable income in low-tax ones.

Determining the fair market value of intellectual property is difficult, said John Samuels, the top tax lawyer for General Electric, which gets more than half its sales outside the US.

Transfer pricing "is the soft underbelly of the income tax", Mr Samuels said last month. "Nobody understands it."

The Obama administration said this uncertainty creates opportunities for companies to shift their intangible assets to low-tax countries.

The proposal in Mr Obama's budget plans may also affect companies such as Coca Cola and pharma giant Merck, which report tax burdens below the top 35pc US corporate rate through the use of intangible property and global operations.

"Any high-tech company that has international operations, which is almost all of them, they'll be worried about this," said Stewart Karlinsky, a professor emeritus at San Jose State University who advises technology companies on tax legislation.

The administration proposal would force companies to immediately pay US tax when they receive "excessive returns" of more than 30pc that are traced to intangible property owned by offshore subsidiaries operating in countries with effective tax rates of less than 10pc, according to an administration official. (Bloomberg)

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