Obama to crack down on business taxes

[May 04, 2009]  WASHINGTON (AP) -- President Barack Obama plans to propose changes to tax policy certain to be unpopular with corporations with international divisions and individuals who use tax havens. Obama also plans to ask Congress for 800 new federal tax agents to enforce his broad requests.

Obama's two-piece plan, to be announced at the White House on Monday, would eliminate some tax deductions for companies that earn profits in countries with low tax rates, as well as consider U.S. citizens who use tax havens such as the Bahamas or Cayman Islands guilty of violating U.S. tax laws. If Obama wins congressional approval for the changes -- and he faces a challenge on Capitol Hill -- it could deliver $210 billion in tax revenue over the next decade.

Treasury Secretary Timothy Geithner was to join Obama for the 11 a.m. comments.

Officials described the administration's plan ahead of the announcement on the condition of anonymity so they wouldn't upstage the president's remarks. However, they acknowledged the political challenges facing the plan. The administration won't seek a complete repeal of overseas tax benefits and, although the rule changes are narrower than some anticipated, business leaders still oppose them as a tax hike. Obama aides countered that the plan is a step toward a massive overhaul of international financial regulations the president has promised.

In exchange, Obama said he was willing to make permanent a research tax credit that was to expire at the end of the year and is popular with businesses. Officials estimate that making the tax credits permanent would cost taxpayers $74.5 billion over the next decade.

But administration aides said 75 percent of those tax credits paid workers' wages; given the struggling economy, aides were reluctant to do anything that could add more Americans to the unemployment rolls.

It was small comfort. Companies who shelter profits in international accounts stand to lose billions if Obama's plan becomes law. Under the existing regulation, those companies pay taxes only if they bring the profits back to the U.S. If they keep the profits offshore, they can defer paying taxes indefinitely -- and many do.

Obama's plan wouldn't go into effect until 2011; Obama has said he does not want to tinker with tax revenues until his $787 billion stimulus plan has run its course. The proposals, however, were far from complete, and aides said this was just one piece of the administration's plan for sweeping overhaul.

First up: Companies won't be able to write off domestic expenses for generating profits abroad. For instance, administrative tasks performed in New York for a London office would not be tax-deductible in the United States.

Administration officials depicted the move as a way to close unfair tax loopholes that encouraged companies to send jobs overseas. They argued that if it costs the same amount to do business in, say, Ireland as in Iowa, why not do it entirely in Des Moines? Officials said Obama would characterize the move as a way to keep jobs in the United States and fight a system that is rigged against U.S. companies who keep their entire business operation domestic.

Obama also planned to ask Congress to crack down on tax havens and implement a major shift in the way courts view guilt. Under Obama's proposal, Americans would have to prove they were not breaking U.S. tax laws by sending money to banks that don't cooperate with tax officials. It essentially would reverse the long-held assumption of innocence in U.S. courts.

If financial institutions cooperate with Washington and disclose details when asked, Americans could invest anywhere they like.

Obama officials also said they would close a Clinton-era provision that would cost $87 billion over the next decade by letting U.S. companies "check the box" and treat international subsidiaries as mere branch offices. Officials said it was meant as a paperwork shortcut that is now a widely used and perfectly legal way to avoid paying billions in taxes on international operations.

The White House said that in 2004, multinational corporations enjoyed an effective tax rate of 2.3 percent in the United States because of such allowances. Aides said that was the most recent year available for analysis.

Officials said the situation was indefensible.

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[Associated Press; By PHILIP ELLIOTT]

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