Obama proposes minimum taxes on foreign earnings
The proposed move would make it a bit tough for US multinationals to ship jobs overseas and will give incentives to those who bring operations back into the US.
The Treasury Department said that the US business tax system does too little to encourage job creation and investment in the US and creates too many opportunities that encourage shifting production and profits overseas.
In a statement, Obama said the current corporate tax system is outdated, unfair, and inefficient.
"It provides tax breaks for moving jobs and profits overseas and hits companies that choose to stay in America with one of the highest tax rates in the world. It is unnecessarily complicated and forces America`s small businesses to spend countless hours and dollars filing their taxes," he said adding that this needs to change.
He said the tax system should not give companies an incentive to locate production overseas or engage in accounting games to shift profits abroad, eroding the US tax base.
"Introducing the principle of a minimum tax on foreign earnings would help address these problems and discourage a global race to the bottom in tax rates," it said.
The Treasury yesterday released the President`s framework for reforming the US business tax system, which would enhance American competitiveness by simplifying the tax code and eliminating dozens of tax loopholes and subsidies, incentivising job creation and investment here at home and lowering the business rate while broadening the tax base.
According to the framework, the President believes it must prevent companies from reaping the benefits of locating profits in low-tax countries, put the US on a more level playing field with its international competitors, and help end the race to the bottom in corporate tax rates.
"Specifically, under the President`s proposal, income earned by subsidiaries of US corporations operating abroad must be subject to a minimum rate of tax. This would stop our tax system from generously rewarding companies for moving profits offshore," it said.
"Thus, foreign income deferred in a low-tax jurisdiction would be subject to immediate US taxation up to the minimum tax rate with a foreign tax credit allowed for income taxes on that income paid to the host country," it said.
The US President is also proposing that companies will no longer be allowed to claim tax deductions for moving their operations abroad.
At the same time, to help bring jobs home, the President is proposing to give a 20 per cent income tax credit for the expenses of moving operations back into the United States.
The Framework would also clean up the international tax code and reduce incentives and opportunities to shift income and assets overseas.
Noting that the current tax codes tends to favour shifting production and profits overseas, the President`s framework said in addition to the evidence that companies generally shift income from high-tax foreign countries to low-tax foreign countries, there is also evidence of income shifting specifically from the United States to other countries.
"Income shifting from the United States to other countries significantly erodes the US tax base and leads to lower corporate tax receipts.
"Evidence suggests that high statutory tax rates may also affect a company`s willingness to locate in the United States following mergers and acquisitions," it said.
Proposing to reduce the corporate tax rate from 35 per cent to 28 per cent, the Obama Administration said this reduction in the rate would put the US in line with other advanced countries, help encourage greater investment in the US, and reduce the tax-related economic distortions.
The presidential framework said it should properly balance the need to reduce tax incentives to locate overseas with the need for US companies to be able to compete overseas; some overseas investments and operations are necessary to serve and expand into foreign markets in ways that benefit US jobs and economic growth.
"This will be a difficult and complex undertaking, but one guided by the sole criteria of promoting growth in the jobs and standard of living of American workers and their families," it said.