Obama declares war on Ireland over tech tax avoidance

President Obama has declared war on Ireland, the Netherlands and Bermuda, and is giving Silicon Valley a long hard stare as he overhauls America's tax system to bankroll his campaign pledges.

The White House has unveiled proposals to clamp down on US firms it reckons are hiding profits overseas to benefit from lower tax rates, while claiming exemptions for overseas investment on their US tax returns. DC is also targeting wealthy US individuals as well as corporations who are evading US taxes by hiding their cash in tax havens, such as the Cayman Islands, effectively avoiding tax in the US or pretty much anywhere else.

Obama singled out Bermuda, the Netherlands and Ireland, pointing out that "nearly one-third of all foreign profits reported by US corporations in 2003 came from [those] three small, low-tax countries".

Obama and his team plan to scrap "deferral rules" which allow US firms to claim exemptions, or deductions, on their investments in foreign countries - building factories, R&D centers and the like - while "deferring" taxes on profits from those operations, sometimes indefinitely. Cash balances built up overseas are also effectively shielded from US tax.

The Obama White House says this would encourage US companies to create jobs back in the motherland, and would raise $103.1bn in fresh US taxes over ten years. The tax haven crackdown should realise $95.2bn over ten years.

As a consolation prize for companies scared witless by the prospect of paying the US's swingeing corporate tax rates, Obama will make the "Research and Experimentation Tax Credit for Investment in the United States".

The proposals have put the fear into Silicon Valley's tech industry.

US firms dominate the world's high tech industries, meaning they may be more dependent on overseas profits than other US organisations. Losing those tax advantages would force some painful readjustments to their business models.

Incentives for investing in US R&D might not be much of a compensation. By investing in overseas R&D is that they can generally get access to foreign brains for less than they'd have to pay them if they were based in the US. If they started boosting their R&D in the US, tech firms would then face the problem that most US youngsters would rather pitch for a basketball scholarship or failing that an MB, rather than any subject that might involve slide rules and grappling with complex equations. They'd only have to import the brains - which would be more expensive than employing them in their native lands, and doesn't solve the problem of underemployed Americans.

While the proposals might give US firms pause for thought when it comes to setting up new factories overseas, potentially creating some jobs back home, it's harder to see how the plans would eliminate that other big threat - outsourcing. Much of the activity here is around US companies getting responsibility for business processes off their books to foreign firms for a fee, rather than bankrolling their own operations overseas.

Infosys chief exec S Gopalakrishnan, was sanguine, telling the Economic Times: "Right now, I do not see any impact on our business."

Meanwhile, Ireland is somewhat more panicky, with the Irish development agency insisting it was taking action to reduce the impact of the changes, and the government insisting the effect would not be as bad as first feared. They could be right in one regard: with Dell already largely exiting Ireland, the country's high tech sector was already in a mess, even before the Obama plan.

In the longer run, Obama's proposals could actively damage the US' economic interests, argue the Business Round Table.

“Ninety-five percent of the world's consumers live outside the United States, making international growth key to US companies’ success," the organisation said. "When US companies expand abroad, America’s exports go up and America’s workers gain access to more and better paying jobs at home.

"This proposal would reduce companies’ ability to compete abroad, cutting off these benefits to US workers.”

Of course, the proposals will create US jobs in the short term at least, as the tech industry and other sectors mobilise armies of lobbyists and lawyers to kneecap the legislation. ®