Obama Takes Aim at Tax Havens

WASHINGTON (CN) - President Barack Obama and Treasury Secretary Timothy Geithner unveiled plans Monday to collect $210 billion more in taxes over the next decade by cracking down on tax havens and eliminating the benefits of creating jobs overseas. Referring to a building in the Cayman Islands that is headquarters to 18,000 corporations, Obama said, "It's either the largest building in the world or the largest tax scam in the world. I think Americans know which one it is."

The Cayman Islands has no capitol gains tax.

Obama said this is only the first step towards a simpler and fairer tax system. "It's a down payment on the larger tax reform we have to make," he said.

The President suggested loopholes for offshore profits are widely used. In 2004, multinational U.S. companies paid $16 billion in U.S. taxes for $700 billion worth of foreign earnings, which comes to a 2.3 percent tax rate.

"This is something I talked about again and again during the course of the campaign," Obama said.

There are strong financial incentives for American companies to invest overseas. Offshore expenses qualify for the same tax deductions as in the U.S., even if they are in a country that has low taxes. This means a U.S. company that builds a factory in Ireland, a low-tax country, will get the same tax deduction as all American companies but it will pay less tax on the profits that the factory generates.

"They take deductions on their expenses when we do not get taxes on their profits," Obama said.

Obama hopes to raise $60.1 billion by closing this loophole.

In another example of the benefits of investing overseas, companies have been allowed to transfer profits freely between their firms, even if they have branches in other countries. Over the last 10 years, laws have allowed businesses to move profits out of the jurisdiction of the U.S. to countries where they pay less or no tax.

Closing the loophole will capture $86.5 billion in taxes over a 10 year period.

Not surprisingly, almost a third of all foreign profits reported by U.S. companies in 2003 were in Bermuda, the Netherlands, and Ireland, three countries with low corporate tax rates.

But the plan isn't just to tax companies more. Obama plans to retrofit incentives for companies to invest in the U.S.

Currently the government subsidizes company research with a 20 percent tax credit on related expenses. The incentive was extended 13 times, but has never been made permanent. This makes it difficult for corporations to take the incentive into consideration when they decide where to conduct research.

Obama plans to make the tax credit permanent.

In addition to closing legal loopholes, the administration hopes to crack down on downright illegal tax havens.

Under the new plan, overseas banks will need to provide 1099s for their American clients, and the G-20 has already taken steps to impose sanctions on countries judged to be withholding information, which will raise $8.7 billion over 10 years.

To enforce the new rules, the IRS will hire 800 new employees specifically for international enforcement. According to the agency, every dollar invested in the IRS yields four more dollars in tax revenue.

"This is money that can be spent on reinvesting in America," Obama said.

Obama and Geithner hope to get legislation passed and have the changes in effect by 2011.

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