ANALYSIS: Companies Too Big to Invert Would Take Brunt of Obama Tax Plan

NEW YORK (Bloomberg News/TNS) -

President Barack Obama’s proposal to tax the offshore profits of U.S. 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 percent on the $2.1 trillion U.S. companies have stockpiled abroad, sidestepping the Internal Revenue Service. It also calls for a 19 percent minimum tax on future foreign earnings. The prospect of those increased taxes could spur some companies to relinquish their U.S. residency altogether — either by merging with a foreign partner in a corporate inversion or finding a foreign buyer, according to J. 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 U.S. 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 Harvey, a tax professor at Villanova School of Law in Pennsylvania.

Most of the offshore corporate profits that would be subject to the tax are 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 Co., Microsoft Corp. and Citigroup Inc. would take a big one-time hit to earnings, even though the rate is less than half of that levied on domestic income. Apple Inc., which has reported keeping $137 billion indefinitely invested offshore, would owe nearly $18 billion under the Obama plan; JPMorgan Chase & Co., which holds $28.5 billion, could expect a tax bill of $2.5 billion.

Though the measure would have an immediate impact on earnings, the companies could pay the taxes over five years. Andrew Gray, a JPMorgan spokesman, declined to comment. Steve Dowling, a spokesman for Apple, didn’t immediately respond to an email and a phone call seeking comment.

Obama’s corporate-tax plan, which received a cool welcome from Republicans and business leaders, is viewed as an opening bid in the negotiation to rewrite the convoluted U.S. corporate-tax code, which imposes a top rate of 35 percent on worldwide income, but only taxes foreign income when it’s brought home. The president suggests lowering that top rate to 28 percent and to 25 percent for manufacturers.

U.S. companies have been pushing for an overhaul for years, saying that it puts them at a disadvantage compared with competitors from countries that only tax domestic income. Others argue that the U.S. system rewards multinational corporations with aggressive tax strategies, allowing them to shift their burden to individual taxpayers and companies without overseas operations.

The White House proposal also would bring a drop in profit for the companies with cash stockpiled overseas because it would force them to declare the tax bill immediately as an expense against earnings. Currently, companies can defer declaring a tax expense on overseas profits until they are brought back to the U.S. and become subject to federal taxes.

That could be significant for companies like Eli Lilly & Co., which holds $23.7 billion in overseas profits, equal to almost a third of its $79 billion market capitalization. The Obama proposal would create a one-time tax of as much as $3.3 billion, which would also be reported as an expense, and is larger than the company’s entire 2014 net income of $2.39 billion. The final tally would depend in part on whether credits for foreign taxes paid could offset part of the U.S. bill. Lauren Zierke, a spokeswoman for Eli Lilly, declined to comment, and pointed to a statement from Let’s Invest for Tomorrow America, a coalition of U.S.-based companies.

The Obama plan would “move the United States further away from the solutions we need to strengthen our competitiveness abroad and grow our economy here at home,” said Claire Buchan Parker, a spokeswoman for the group.

Robert Ricketts, a tax professor at Texas Tech University in Lubbock, said many U.S. companies that have stockpiled cash overseas were motivated by a desire to manage their earnings rather than to reduce their taxes. Pushing their potential tax expenses into the future allowed them to report higher earnings.

“The companies that have been the most aggressive will be harmed the most,” Ricketts said. “But it will be hard to feel bad for them because they brought it on themselves. They didn’t change the way they structured their operations. It was a paper allocation.”

Business leaders criticizing the Obama plan complained that it would do little to encourage domestic hiring and investment. While the 19 percent minimum rate on future foreign earnings is a significant reduction from the top rate, it would still be substantially higher than countries like Ireland, which has a top rate of 12.5 percent.

Jay Timmons, President and CEO of the National Association of Manufacturers, said his group “strongly opposes” the proposals to tax U.S. companies on their overseas profits and warned the measure could stifle the revival of U.S. manufacturing.

“If the president is serious about helping manufacturers sustain their resurgence in the United States, this outrageous budget proposal is a bad place to start,” Timmons said.

Others say there is little evidence to suggest that making it easier for companies to bring their foreign earnings home would spur investment in the U.S. In 2004, a repatriation holiday allowed U.S. companies to bring overseas profits back at a rate of just 5.25 percent. More than 800 U.S. companies took advantage of the offer to move $362 billion that had been offshore. Studies afterward showed that the cash inflow provided little stimulus: more than 90 percent of that money was used for share buybacks and dividends, and some of the companies that transferred the most cash actually dismissed U.S. workers.

“These companies shifted some of their profits offshore to avoid paying the statutory rate on their U.S. profits,” said Robert McIntyre, Director of Citizens for Tax Justice, a Washington-based advocacy group that says corporations don’t pay enough. “They should not receive a reward for dodging their tax bills in the form of a substantially lower tax rate.”


Richard Rubin contributed to this report.