Tags: obama | overseas | tax

Obama Ditches Tax on Companies' Foreign Operations

Wednesday, 14 Oct 2009 10:56 AM

By Dan Weil

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President Obama has abandoned a plan to impose $210 billion in taxes on U.S. companies with operations overseas.

The move came after a slew of businesses complained about the levy. Still, White House officials tell The Wall Street Journal that the idea hasn’t been abandoned completely. It could be revived next year as part of a broader tax overhaul.

While most developed countries tax their companies only on revenue earned at home, the United States taxes companies on worldwide profits.

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Current law allows U.S. corporations to defer paying taxes on money earned overseas until the money is repatriated.

Those who support the rule change say the current regulation gives companies incentive to duck U.S. taxes by moving production abroad. During the presidential campaign Obama vowed repeatedly to "end tax breaks for companies that ship jobs overseas."

But U.S. corporate executives argue that the deferral provision makes them more competitive globally. And that in turn allows them to expand their U.S. operations.

If the deferral is axed, they say their businesses will suffer to the point that they must cut jobs domestically.

Given the vociferous opposition from business, the White House was forced to backtrack. It doesn’t want to alienate the business community while trying to pass healthcare reform, stronger bank regulation and climate control legislation.

The Obama administration had trumpeted the proposed change as an overdue repair to the tax code and potentially an important source of revenue.

"This has gone all of a sudden from red-hot to white-cold," Michael Klayko, chief executive of Brocade Communications Systems, told The Journal.

But he’s worried that if the idea becomes part of the healthcare debate, "it could go back to red-hot again."

Andrew Busch, global currency strategist at BMO Capital Markets, praised the administration’s change of heart.

“Changing existing tax treaties/arrangements with other countries is an extremely delicate and difficult task,” he wrote on CNBC.com. “Essentially, it creates more negative unintended consequences than positive tax flows into the U.S. Treasury's coffers.”

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