Obama Tax Plan Hitting Silicon Valley

President Barack Obama’s new plan to tax overseas profits is getting heat from technology companies which believe they will be adversely affected.

While technology companies are not specifically targeted by the tax package, many, like Cisco, HP, IBM, Microsoft and Dell have substantial overseas activities and profits. Foreign earnings also represent a more significant poriton of the revenue mix for U.S. tech companies than companies in most other sectors because of the extent to which they dominate the global technology industry. In IBM’s case, foreign sales is a deliberate attempt to diversify its sales. HP had $12.9 billion in tax-free cash at the end of its last financial year, while Microsoft had $7.5 billion, according to the Financial Times‘ review of their SEC filings.

The provisions of the tax package would remove many incentives U.S. companies have to keep those profits overseas, in the hopes of raising additional tax revenues and encouraging multinational corporations to reinvest their profits in the U.S. To offset some of the sting for the tech sector, the Obama Administration is also proposing to make permanent the tax credit for research and development that is set to expire on Dec. 31 of this year.

Tech companies, however, have expressed their anger through trade groups as well as in private conversations. The CFO of one company I reached today said he feels it’s unfair to consider overseas profits as “tax avoidance.” He said companies need to keep profits overseas to hedge on currency losses and in order to avoid paying taxes twice. But he also said that, given that his company doesn’t offshore development jobs, he likes the idea of getting credit for keeping jobs in the U.S.

Likewise, a lawyer who represents multinational corporations said that while he personally believes the reform “is the right thing,” his clients will fight it hard. He predicts that the reform won’t be enacted in its present form. The CFO also admitted that he thinks, “[Obama is trying to make things simple, and the more he simplifies things, the more it's beneficial."

The Semiconductor Industry Association (SIA), an industry trade association, issued a statement saying that the proposed changes to international tax rules could actually encourage companies to transfer manufacturing and research and design activities offshore. "While we applaud the Administration’s goal of encouraging investment in R&D and manufacturing operations in the United States, as evidenced by its proposal to make the research credit permanent, we are very concerned that the international tax proposals would have exactly the opposite result," SIA President George Scalise said in the statement. "Nearly all of the countries with which America competes for investment either defer taxes on foreign earnings or do not tax them at all. Changes such as weakening the deferral of such taxes would place U.S. companies with foreign subsidiaries at a competitive disadvantage."

Of course, U.S. companies are held to different standards than foreign competitors in many other ways as well; for instance, some countries allow corporations to write off bribes to foreign officials as expenses for tax purposes.

Some of the specifics of the Obama plan include:

- Requiring certain foreign subsidiaries to be considered as separate corporations for U.S. tax purposes, which is expected to raise $86.5 billion in revenues between 2011-2019. According to RGE Monitor, "[Multinational corporations] have created foreign subsidiaries in low-tax countries to transfer their assets and borrow from such subsidiaries;”
- Preventing companies from receiving deductions on U.S. tax returns supporting their offshore investments until they pay taxes on their offshore profits, which is expected to raise $60.1 billion;
- Closing loopholes that allow U.S. companies to get tax credits for dollar-for-dollar taxes paid for foreign governments that companies often artificially inflate, which is expected to yield $43 billion in revenues;
- Making the research and development tax credit permanent, providing a tax cut of $74.5 billion over 10 years for businesses that invest in innovation and research; and
- Requiring foreign financial institutions that have dealings with the U.S. to share information about their U.S. customers.