The Obama administration is continuing its efforts to stimulate the economy, with tax lawyers the latest beneficiary of its plans. Under the guise of closing loopholes, the government has its eyes on the profits made in foreign subsidiaries of US companies, aiming to raise $210bn of tax revenue between 2011-2019.
The plans are yet to be fleshed out in detail, but three changes have been mooted. The first concerns the allocation of expenses, and indicates a more aggressive stance on revenue raising. At present a US multinational may deduct some expenses incurred abroad against its US tax liability, but defer paying tax on foreign income until it is repatriated. The aim is to end that mismatch, seemingly by creating an additional layer of rules over those already in place covering expense allocation.
The second plan, affecting foreign tax credits, seeks to tweak a system that even tax experts concede is mind-bogglingly complex. A company can offset taxes paid elsewhere against its ultimate US liability. Large multi-nationals have spent years designing corporate structures to maximise the benefit. The move is the smallest in revenue raising terms – just $43bn – but may be of most importance to investors. Using foreign tax credits is one method many companies use to lower the tax rate reported on income statements, even if overall cash taxes paid remain unchanged.