Obama takes aim at US multinationals

Barack Obama on Monday unveiled a sweeping crackdown on offshore tax avoidance by US companies, in a move likely to affect the way Britain taxes profits earned by UK companies operating abroad.

Mr Obama, who campaigned relentlessly on the issue of closing offshore loopholes, said the steps he announced would raise $210bn (£140bn) over 10 years and “make it easier” for companies to create jobs in Buffalo, New York, rather than in Bangalore, India.

But corporate America reacted with dismay, saying the rules – which would affect multinationals such as General Electric and Procter & Gamble – would put US companies at a disadvantage to foreign rivals.

“It is the wrong idea, at the wrong time for the wrong reasons,” said John Castellani, Business Roundtable president. “It will cripple growth, reduce the competitiveness of US companies overseas and destroy jobs.”

Mr Obama’s move will be studied around the world, however the administration on Monday highlighted Ireland, the Netherlands and Bermuda as examples of how distortionary existing tax policies are, saying the three accounted for more than a third of US foreign profits in 2003.

In London, Chris Sanger, head of tax policy at Ernst & Young, said the US move could have implications for the Treasury’s long-running review of UK anti-avoidance rules relating to foreign income. “From the UK perspective, it may put more pressure on it to see if its new rules are consistent,” Mr Sanger said.

He added the Obama administration’s proposal would put US tax policy at odds with much of the rest of the world, where it is common for profits earned abroad not to be taxed at home.

The steps announced by President Obama would include closing down the “check box” loophole that enables companies to avoid US and foreign taxes by shifting income to subsidiaries based in offshore tax havens.

He cited a Cayman Islands building where more than 18,000 US companies are housed. “Either this is the biggest building in the world or it is the biggest tax scam in the world,” Mr Obama said. “I think the American people know which it is.”

The administration also estimated that US companies paid an effective tax rate of just 2.3 per cent on the $700bn they earned in foreign profits in 2004.

Under Mr Obama’s proposals, which are likely to be included in this year’s budget document, US companies would no longer be able to claim deductions against their tax bill before they had paid taxes on offshore profits. The administration would also close the loophole whereby companies that claim a US tax credit on taxes paid to overseas jurisdictions then inflate and accelerate those credits.