Mediaboss Marketing

Obama and GOP leaders are in agreement on many corporate tax reform policies. But on the question of how foreign earnings of U.S.-basedmultinationals should be taxed, the gap remains wide.

At first glance, it looked like President Obama and congressional Republicans were miraculously headed in the same direction on corporate tax reform.

Howard Gleckman is a resident fellow at The Urban-Brookings Tax Policy Center, the author of Caring for Our Parents, and former senior correspondent in the Washington bureau of Business Week. (http://taxvox.taxpolicycenter.org)

Reform plans by Obama andGOP leaders such as House Ways & Means Committee Dave Camp (R-MI) seemedsimpatico. Both sides embraced lower rates. Both endorsed ending business tax subsidies, through neither had much to say about which ones. But on one fundamental issue the gap between Obama and the GOP remains wide.

How would theytax foreign earnings of U.S.-based multinationals? Both sides agree that the current system is the worst of all worlds: It is immensely complicated, wildly distorts economic decisions, and collectslittle revenue.

But when it comes to the solution, Obama and the Republicans seem headeddowndifferent roads. Obama wants to force U.S. companies to pay more tax on their overseas profits.Many Republicans would exempt offshore earnings from U.S. tax liability.

To understand where reformers are headed, think about todays system. Under our current worldwide structure, foreign subsidiaries of U.S.-based firms must pay U.S. tax no matter where they earn their income. To prevent profitsfrom being taxed twice,those firms get a credit against their U.S. tax for the levies they pay to other countries.

Those foreign tax rates are nearly always lower than in the U.S.But because U.S. rates are relatively high, companies game the system to avoid domestic levies on their overseas income, and even to reduce U.S. tax ondomestic income.

Under a practice known as deferral, U.S. firms dont pay U.S. tax until they bring their profits home. This allows them to reinvest earnings in foreign subsidiaries and, in effect, never pay those high U.S.rates.

Firms also use sophisticated accounting gimmicks to shuffle income to low-rate countries while shifting deductible expenses back home, where they can offset domestic profits and lower theiroverall U.S. tax liability. Sometimes, they actually move their productionand their jobsoverseas to avoid U.S. tax (though thats rarely the most commonreason).

Here is the original post:
Obama and GOP: What's holding up corporate tax reform?

A little over a month ago, the Democratic National Committee lambasted Mitt Romney for not initially reporting funds in "notorious tax havens" scattered around the world.

It turns out a campaign "bundler" for President Obama is in the business of helping people, like Romney, who are looking to take advantage of offshore tax law.

Marjorie Rawls Roberts, who according to the Obama campaign volunteered to raise between $100,000 and $200,000 for the president's re-election effort, is an attorney in the U.S. Virgin Islands who offers clients guidance on the islands' perk-filled tax system.

According to her bio, she "specializes in the areas of tax, investment, and offshore funds." This includes helping clients on tax planning and "qualification for one of the economic incentives available in the U.S. Virgin Islands."

The Obama campaign has not responded to a request for comment for this story.

The Obama White House, though, has decried the use of "offshore tax havens" to avoid paying higher tax rates.

The U.S. Virgin Islands does not have the same international notoriety as a tax haven as, say, the Cayman Islands -- where Romney was parking some of his investment money, though the Romney campaign has said the money was taxed just as it would be in the U.S.

But the Virgin Islands offer substantial benefits to those who qualify.

Businesses, for instance, that meet certain conditions are legally eligible for a 90 percent tax cut.

It's also the only place under the U.S. flag where a non-American can set up a tax-free company.

See the rest here:
Obama bundler works as Virgin Islands tax adviser

News that Barclays (LSE: BARC.L - news) has fallen foul of the authorities for “highly abusive” tax avoidance schemes will not come as a surprise to those who follow Britain’s banks.

Barclays has long been perceived as the most aggressive player in the tax structuring business, devising products that arbitraged the rules to reduce clients’ bills. At its peak, Barclays even turned a part of its operation structured capital markets (SCM) over to tax avoidance.

SCM, under Roger Jenkins, became a huge profit engine. In one year, it was reported to have made £1bn for the bank and, shortly afterwards, Jenkins shot to notoriety as Barclays’ best-paid employee pocketing a reputed £40m a year. As SCM sat within the investment bank, Barclays Capital, the details were never properly disclosed, but never officially rebutted either.

Though legal, the behaviour raised ethical questions that came into particular focus after the financial crisis as, although Barclays never received direct taxpayer support, it relied at times on state funding schemes to keep afloat.

The backlash began in 2009, when Barclays hit the headlines after a whistleblower leaked documents to the Liberal Democrats which purported to show that it was using a network of subsidiaries in the Cayman Islands and Luxembourg to minimise clients’ taxes.

Barclays had the story injuncted on the grounds that the material was commercially sensitive, but its reputation took a hit and questions began to be asked about how much tax the bank itself was avoiding.

Early last year, it was forced into an embarrassing admission. In front of the Treasury Select Committee, chief executive Bob Diamond, who had nurtured SCM when he was head of BarCap, was forced to reveal that the bank operated nearly 300 subsidiaries in tax havens and had paid just £113m of corporation tax in the UK in 2009 a year in which it handed out £3.4bn in bonuses.

Since then, the questions have not gone away. Politicians have queried whether a bizarre deal struck in 2009 to move billions of toxic assets off its balance sheet was not just a tax ruse. The Protium arrangement raised such serious concerns in the US that the authorities would not let it drop until the deal was unwound at great expense to shareholders last year.

Analysis of Barclays accounts by The Daily Telegraph has raised further questions. According to the 2010 results, the bank generated £591m in “tax losses carried forward” despite making £6bn of profits before tax. The tax gain suggested the bank crystallised £2bn of losses that year, which the annual report said “mainly relates to entities in the USA, the UK and Spain”.

However, Barclays would not disclose where the £2bn of losses were incurred once again muddying the waters. The bank now has assets that it can offset against future tax payments that are almost as large as Royal Bank of Scotland and Lloyds Banking Group (LSE: LLOY.L - news) . While both the state-backed banks made huge visible losses, Barclays has reported profits every year for more than a decade.

The bank has always tried to draw attention to the tax it is paying, which the latest results showed was 32.8pc of profits in 2011, but so far it has not been enough to answer its critics.

Meanwhile, the question of business ethics keeps arising. At the end of last year, in his BBC Business Lecture, Diamond remarked that “rebuilding trust requires banks to be better citizens”. Barclays has also repeatedly stressed: “We are signatories of the UK Government’s code of conduct on tax and comply with the spirit and letter of the tax code.”

However, the authorities this week clearly decided that Barclays has been complying with the letter but not the spirit of the code. According to David Gauke, Exchequer Secretary to the Treasury, Barclays should never have devised the schemes that it has been ordered to close in the first place.

“The bank that disclosed these schemes to HM Revenue & Customs (HMRC) has adopted the Banking Code of Practice on Taxation which contains a commitment not to engage in tax avoidance,” he said. “The government is clear that these are not transactions that a bank that has adopted the code should be undertaking.”

As Gauke observed, the retrospective charge, which sources say will cost Barclays about £150m, will deliver the bank “a substantial reputational hit”. And, once again, it is not a surprise it was Barclays that came under fire.

See the original post:
Barclays has previous when it comes to tax avoidance

On paper, the U.S. has one of the highest corporate tax rates in the world. But in practice, corporations pay far less. The Government Accountability Office (PDF) estimated the average tax burden at 25.2 percent, and some of the largest corporations, such as General Electric and Wells Fargo, pay no taxes at all. This is possible because the tax code is riddled with exceptions and loopholes, created at the behest of lobbyists and exploited by teams of tax experts, many of whom used to work for the IRS and the Treasury. With the help of Citizens for Tax Justice, The Daily Beast rounded up some of the most egregious corporate tax loopholes.

Deferral of Overseas Income

Multinational companies don’t have to pay U.S. income taxes on overseas profits until they transfer them back home. But in reality, companies just leave their profits in overseas tax havens, deferring taxes indefinitely. Not only that, an accounting scheme known as “transfer pricing” allows companies to move profits from the U.S. to offshore havens so they’re counted as overseas earnings. For example a pharmaceutical company could sell a drug patent to a subsidiary in the Cayman Islands for a nominal fee, then have the subsidiary charge the parent company huge licensing fees. The company can then deduct the licensing fees from its taxable income in the U.S. and send the profits to its foreign subsidiary, where taxes can be indefinitely deferred. Some 83 percent of top 100 publicly traded companies had tax-haven units in 2009, according to the GAO. General Electric, Google, Pfizer, and many other companies use this technique. The federal government loses an estimated (PDF) $100 billion a year through offshore tax abuses.

Deductions for Shipping Jobs Overseas

At first glance it doesn’t seem particularly egregious that corporations can deduct moving expenses, but that changes when the break is applied to companies moving operations overseas. President Obama proposed ending this exemption for companies moving overseas while giving a credit to companies moving back to the U.S.

The Domestic Production Deduction

This deduction was meant to encourage companies to keep manufacturing operations in the U.S. by allowing them to deduct profits from “qualified production activities.” But by the time the law was enacted, those activities had expanded to include not just manufacturing but everything from oil drilling to filmmaking to real estate. (Obama proposed barring oil and gas companies from using the deduction.) The Center on Budget and Policy Priorities estimated that the deduction cost states $500 million in 2011, and the Congressional Budget Office (PDF) estimates it will cost the federal government $163 billion over the next decade.

Getty Images (3)

Last-In, First-Out Accounting

Normally when you buy something for $30 and sell it for $50, you have to pay taxes on a $20 profit. But corporations—especially oil companies—manage their accounts differently. They might buy oil for $30 a barrel, and then buy some more for $45 a barrel later in the year. Then when they sell a barrel of oil for $50, they get to assume that they sold the last barrel they bought, the one that cost $45, allowing them to report a profit of $5 instead of $20. Citizens for Tax Justice estimates that the loophole is worth $97 billion over the next 10 years.

Punitive Damages Deduction

When corporations are hit with punitive damages, they’re able to write them off as an “ordinary and necessary” business expense (PDF). Consequently, Exxon’s $1.1 billion Alaska oil spill settlement actually cost the company $524 million after taxes. Obama’s budget proposes to eliminate the deductibility.

Accelerated Depreciation Deduction

This allows companies to deduct for the depreciation of a piece of equipment at a faster rate than it actually takes the equipment to depreciate. Because interest expenses are also deductible, a company can borrow money to buy equipment, deduct both the interest on the debt and the “accelerated” depreciation of the equipment, and claim deductions greater than the profits generated by the investment. It’s one of the loopholes that allow corporations to pay no taxes during profitable years.

The corporate jet deduction became a hot-button issue during the debt-ceiling debate when President Obama used it as leverage against the Republicans. Under the current law, corporations can claim deductions for the depreciation of their jets at a faster rate than commercial airlines can. Closing the loophole wouldn’t save much money—about $4 billion over 10 years—but as a political symbol, it’s invaluable. (For what it’s worth, yacht owners get an accelerated depreciation deduction plus a few more.)

The 71,000-page tax code is full of accelerated-depreciation loopholes for various industries. Along with corporate jets, NASCAR racetrack owners get a special exemption. They can deduct for the depreciation of their tracks over a seven-year period instead of the 39 years the government estimates (PDF) it actually takes them to depreciate. The break was put in place in 2004 but was renewed in the 2008 financial-system bailout known as TARP. It costs the government $40 million a year.

Follow this link:
8 Ridiculous Tax Loopholes

Stephen Brashear/Getty Images

Boeing employees work on a plane engine at the company's factory in Everett, Wash. The Obama administration's corporate tax cut proposal would offer even deeper cuts for U.S. manufacturers like Boeing.

President Obama's plan to overhaul the nation's corporate tax system would sharply cut the taxes that U.S. companies pay. But it would also eliminate many of the loopholes that help them pare down what they owe.

White House spokesman Jay Carney says the proposal unveiled Wednesday should appeal to both Democrats and Republicans, by doing what both sides "say is important to do ... which is lower the rate, broaden the base [and] eliminate the underbrush of unnecessary subsidies and loopholes and special provisions that complicate the tax code."

But one phrase in Carney's statement reveals why the plan faces an uphill battle in Congress. "Broaden the base" means making more income, from more people, subject to taxation. And business lobbyists know that means eliminating popular tax breaks.

At least on paper, U.S. companies pay a tax rate of 35 percent — higher than almost any other advanced country. Tax Foundation President Scott Hodge says that rate leaves U.S. corporations at a big disadvantage.

"Seventy-five countries have cut their corporate tax rates. And if we look at the rest of the world, it's a very competitive place compared to the United States," Hodge says.

A Tax Code Loaded With Exemptions

But the U.S. tax code is also loaded with exemptions, deductions and credits of all kinds. And, says Bob McIntyre of Citizens for Tax Justice, most big companies know how to take advantage of them. "Right now we have about a 35 percent nominal corporate tax rate," he says. "But our big corporations, on average, pay about half that — about 18 percent."

The Obama administration's plan would cut the corporate tax rate to 28 percent, but it would also get rid of a lot of those loopholes. The plan would also impose a minimum tax on money that companies make overseas, something proponents say would cut down on the use of offshore tax havens.

Administration officials say a simpler tax code would save a lot of companies money. Joel Slemrod, professor of economics at the University of Michigan, agrees.

"Companies spend an enormous amount of money not just complying with the tax system, but planning ... how to make use of these complexities and the differences in tax systems across countries to their best advantage," he says.

To Hodge of the Tax Foundation, which lobbies for lower taxes, the effort to reform the system has come none too soon. "The administration should be given some credit for recognizing that the U.S. corporate tax rate is well out of step with the rest of the world and needs reform," he says.

But Hodge says the proposed tax cut doesn't go far enough. He also takes issue with a portion of the proposal that would cut the tax rate even further for manufacturers. Administration officials say they want to promote the creation of manufacturing jobs because they offer better pay and tend to lead to other kinds of job creation.

Picking Winners And Losers

But conservatives say the proposed boost to the manufacturing sector amounts to the government, rather than the market, picking winners and losers. The U.S. Chamber of Commerce warned that it would vigorously oppose efforts to pit one industry against another.

The idea is opposed by some liberal groups, as well. McIntyre of Citizens for Tax Justice notes that manufacturers already get big tax breaks.

"You take a company like Boeing, for example. ... Boeing hasn't paid a nickel in federal income taxes over the last 10 years. I don't know how you can cut their taxes any further. You really ought to be raising them," McIntyre says.

Such a move is unlikely to get through Congress in any case, particularly in an election year. Slemrod says hacking away at the thicket of tax credits and exemptions tends to be a tough sell in Washington — and lawmakers who try it quickly back down.

"In the past, anyway, the companies that pay more scream louder than the companies that pay less applaud," he says.

Still, there is widespread agreement that the tax code, with all its complexities and inequities, must be overhauled at some point — and that doing so would benefit the economy in the long run. The administration's proposal could set the stage for just such reform later on.

See more here:
Obama's Corporate Tax Cut Plan Faces Uphill Battle