World Economy

Obama Proposes 14% Tax on US Firms’ Foreign Earnings

Obama Proposes 14% Tax on US Firms’ Foreign EarningsObama Proposes 14% Tax on US Firms’ Foreign Earnings

US President Barack Obama’s fiscal 2016 budget would impose a one-time 14 percent tax on some $2 trillion of accumulated US corporate profits earned abroad and set up a 19 percent tax on future foreign earnings, a White House official said on Sunday.

Revenues from the one-time tax would be used to fund infrastructure projects and fill a projected shortfall in the Highway Trust Fund, Reuters reported.

Obama’s fiscal 2016 budget, which is set to be released on Monday, is as much a political document as a fiscal roadmap. It would require approval from Congress to take effect and full approval by the Republican-controlled legislature is unlikely.

The White House has long been critical of practices by US companies that it views as avoiding tax responsibilities at home. The two proposals are part of a broader tax reform package that the Obama administration hopes will refocus tax advantages toward middle-class Americans.

“This transition tax would mean that companies have to pay US tax right now on the $2 trillion they already have overseas, rather than being able to delay paying any US tax indefinitely,” a White House official said. “Unlike a voluntary repatriation holiday, which the president opposes and which would lose revenue, the president’s proposed transition tax is a one-time, mandatory tax on previously untaxed foreign earnings, regardless of whether the earnings are repatriated.”

In the future, the budget proposes that US companies pay a 19 percent tax on all of their foreign earnings as they are earned, while a tax credit would be issued for foreign taxes paid, the official said.

“After this initial payment, foreign earnings could be reinvested in the US without additional tax, which would level the playing field, and encourage firms to create jobs here at home,” the official said. Obama’s proposal is aimed at closing a tax loophole that lets multinational corporations avoid paying taxes on active profits they earn abroad, or that they shift into foreign countries from the United States through various strategies to reduce their US taxable income. As long as these foreign profits are not formally brought into the United States or repatriated, no tax is due on them. Recent estimates put the total of tax-deferred foreign profits at $2.1 trillion.

For 2016, the Obama budget promises a $474 billion deficit, about equal to this year. The deficit would remain under $500 billion through 2018, but would rise to $687 billion by 2025.