Obama tax plans could spark US corporate exodus

US President Barack Obama’s proposal to tax the offshore profits of US corporations could encourage all but the largest companies to follow their cash hoard overseas, according to business leaders and tax lawyers.

The plan would levy a one-time tax of 14% on the $2.1tn (€1.85tn) US companies have stockpiled abroad, sidestepping the Internal Revenue Service.

It also calls for a 19% minimum tax on future foreign earnings. The prospect of those increased taxes could spur some companies to relinquish their US residency altogether — either by merging with a foreign partner in a corporate inversion or finding a foreign buyer, according to Richard Harvey, a former senior official for the Treasury Department and the IRS.

Tax lawyers said there could even be a rush to do so to avoid limitations the administration is also proposing on inversions, in which US companies shift their addresses overseas to tax-friendly locations.

“They are already looking to invert under current law, so if you lay over additional taxes, it seems inevitable that there will be even more incentive for them to get out of Dodge,” said Mr Harvey, a tax professor at Villanova School of Law in Pennsylvania.

Most of the offshore corporate profits that would be subject to the tax is controlled by the giants of the technology, finance and pharmaceutical sectors, whose sheer size makes it difficult to find a merger or buyout partner.

Companies like General Electric, Microsoft and Citigroup would take a big one-time hit to earnings, even though the rate is less than half of that levied on domestic income.

Apple, which has reported keeping $137bn indefinitely invested offshore, would owe nearly $18bn under the Obama plan; JPMorgan Chase, which holds $28.5bn, could expect a tax bill of $2.5bn. Though the measure would have an immediate impact on earnings, the companies could pay the taxes over five years.

Mr Obama’s corporate tax plan is viewed as an opening bid in the negotiation to rewrite the convoluted US corporate tax code, which imposes a top rate of 35% on worldwide income, but only taxes foreign income when it’s brought home.