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Obama proposes tax on unrepatriated corporate profits

Monday, 2 February, 2015

President Obama's 2016 budget proposal today will include a one-time levy on the unrepatriated overseas profits of US corporations, plus a 19 per cent minimum tax on future foreign profits.

Under the current US corporation tax system, income earned and retained by an overseas affiliate of a US company is not taxed in the US, provided the US parent company elects for this exemption. The company is awarded tax credits for its payments to the overseas government, and the 35 per cent US corporation tax rate only applies when the income (or realised capital gains) is repatriated to the US.

This concession (called the ‘check-the-box’ rule after the relevant section of IRS Form 8832) is believed to have helped generate a USD2 trillion accumulation of US corporate profits in foreign jurisdictions. Last year the US Treasury calculated that 14 US-owned multinational businesses had cut their average US corporation tax rate by a quarter over the previous eight years by declining to repatriate foreign profits. Those 14 firms were, at that time, holding USD479 billion of cash assets offshore.

The exemption has also prompted a number of so-called tax inversions – cross-border mergers involving a large US company and a smaller foreign one, with the resulting combined company being domiciled abroad. The effect is that the company's unrepatriated offshore profits are lost to the US Treasury.

Obama has already taken steps to counter the tax inversion strategy. Now – in the last years of his presidency – he is tackling offshore profits.

His 2016 budget proposes a 14 per cent one-off tax on historical unrepatriated profits, payable whether the cash remains overseas or not. Current and future profits of overseas affiliates would be taxed at a minimum of 19 per cent, although the US parent company could repatriate the funds and reinvest them in the US without paying additional taxes.