Risk & Economy » Tax » Obama proposes tax on US companies’ foreign income

A 19% TAX on future foreign earnings and a one-time 14% levy on around $2tn (£1.3tn) in offshore profits could be awaiting US companies, president Barack Obama said yesterday.

The White House has long sought to curtail so-called tax inversions by large US companies, which sees them shift their headquarters overseas in order to take advantage of the favourable tax conditions in other jurisdictions.

The tactic is primarily motivated by the disparity between the US’s high 35% corporate rate and the UK’s imminent 20% rate, brought in by the coalition to attract additional business to the UK. The current rate is 21%.

Last year, Pfizer’s attempted takeover of AstraZeneca failed, but was at least in part motivated by tax. Similarly, San Francisco-based hedge fund Marcato contemplated a move for Intercontinental Hotel Group which would bring with it a UK tax base.

Revenues raised from Obama’s move – particularly the one-off 14% charge – would go towards infrastructure projects.

The Budget, set for release today, is as political as it is fiscal and requires approval from Congress to take effect, but full approval from the Republican-controlled legislature is unlikely.

“This transition tax would mean that companies have to pay US tax right now on the $2tn they already have overseas, rather than being able to delay paying any US tax indefinitely,” a White House official told Reuters.

It’s not the first step taken to scupper inversions. In September last year, it was announced American firms looking to shift their tax base overseas will have to shake up their investor base to ensure at least a fifth of the expanded business is held by new investors.

President Barack Obama has denounced so-called tax inversions as unpatriotic and has urged congress to stop them.

“They’re basically renouncing their citizenship and declaring that they’re based somewhere else, just to avoid paying their fair share,” Obama said at the time.