President Proposes Tax On Overseas Earnings

President Obama has proposed that U.S.-based companies pay a one-time 14% tax on the overseas earnings that they have accumulated. It is estimated that U.S. firms have stockpiled about $2 trillion in offshore profits. In addition, the President wants these companies’ future foreign profits to be taxed at a minimum of 19%.

Under this proposal, companies could reinvest these offshore profits in the U.S. without paying any additional tax. But, firms would pay this 14% tax regardless of whether they bring the money back to the U.S. The president would use the funds from this tax to pay for roads, bridges and other infrastructure projects. While some Republicans are receptive to using a tax overhaul to fund infrastructure, they feel the proposed 14% rate on accumulated foreign earnings is too high.

One can say that Obama is offering U.S. companies the kind of system they have sought; one with lower corporate marginal tax rates and with future foreign profits subject to little or no extra U.S. tax when brought home. However, many companies are seeing these terms as less than favorable because they have been shifting profits to countries like Bermuda and Ireland where they are paying less than 10 percent on their overseas profits.

Companies like Apple, Google and Microsoft have certainly taken advantage of our current tax system that incentivizes them to push profits outside our country and not pay any U.S. tax until they bring the money home. For example, in 2013 General Electric Co. reported $110 billion in undistributed overseas earnings, while the figure for Apple was $54.4 billion.

While many business leaders feel that the President’s proposal falls short, I feel this is a good starting point for any discussion of the much needed overhaul of our corporate tax sysyem. While we need to implement a tax code that will make our country more globally competitive, we need to level the playing field so that all companies in the U.S., big or small, are operating under the same set of rules.

Sources:
Obama Wants a New Tax on U.S. Companies’ Overseas Profits, Bloomberg
Business, Richard Rubin & Jonathan Allen, 1/31/15.

Obama Proposes One-Time 14% Tax on Overseas Earnings, The Wall Street
Journal, Nick Timiraos, John D. McKinnon, 2/5/15.