US tax avoidance

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The Obama administration is continuing its efforts to stimulate the economy. With an overt (protectionist) nod to US workers, the government has its eyes on the profits made by foreign subsidiaries of homegrown companies, aiming to raise $210bn of tax revenue between 2011-2019.

The plans have yet to be fleshed out in detail, but three main changes are mooted. The first concerns the allocation of expenses, and indicates a more aggressive stance on revenue raising. A US multinational may at present 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 multinationals 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.

The third plan is the largest in terms of revenue expectations – predicted to bring in an extra $87bn – and is also the easiest to implement. “Check-the-box” rules cover the way in which companies choose to report the movement of funds between subsidiaries. Overhauling these regulations does not need congressional approval and is likely to expose more foreign income to the US taxman. Businesses with sizeable overseas operations will wail about the cost, but with large federal deficits looming, a world of higher taxes lies ahead.

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