Obama toughens rules on doing business overseas

Get ready to say “adios,” “au revoir” and “zai jian” to some big tax benefits, if your company does business internationally or is hoping to.

President Obama is launching a get-tough crackdown on multinational corporations. And businesses are not happy, to say the least.

Here’s what you need to know.

A full-on blitz
Obama just announced an aggressive plan, set to kick in in 2011. You’ll want to huddle with your CFO as soon as possible to talk about the implications for your company. Among the biggies:

* No more deferral of taxes on some income generated abroad.

* An end to the tax credit for paying taxes to foreign governments, and

* A spike in enforcement, with IRS’s specific target: “tax havens.”

To soften the blow a bit, you will be able to permanently enjoy one biz tax credit for keeping more of that biz in the United States. The “Research and Experimentation Tax Credit” was set to expire at the end of ’09. It’s been extended indefinitely.

0 thoughts on “Obama toughens rules on doing business overseas”

  1. Yes, yes, yes, a thousand times YES! THANK YOU, Mr. President! Outsourcing has been a thorn in my side for a long time and it’s wonderful to see someone in our government putting a stop to our jobs going overseas! We have competent people in the US with many unemployed, who would be happy to have a job! Thank you again.

  2. Kathy -and this is going to save US jobs? How? It’s precisely the reason we’ve had outsourcing to begin with – government intrusion and intolerable tax situations is why companies go overseas for labor. Bringing on more government intrusion will further our employment situation to its ever-narrowing levels.

  3. Kathy – I understand your reaction, but the intuitively obvious reaction in business often times is incorrect. Consider this fact: The US has the highest tax rates on businesses in the world – higher than all of Europe, higher than every communist or openly socialist country (China, Cuba, Russia, etc.), higher than Japan. In the global economy, we are failing to even participate in international tax competitiveness. We are failing to create a tax-favorable environment for business, which will drive innovation, jobs, and ultimately investment (read: loans from overseas) away from the US. The effects of this will take years, maybe even decades, to become fully evident, but they will be devastating.

    The fact is that most US companies are not doing business overseas because they are “greedy” or “evil”, but rather because they HAVE TO in order to have even a chance of success in the global economy because of our already out-of-touch and completely non-competitive tax rates. And when these benefits are gone, do you think these internationals will continue to put so much investment into the US, or will they divert it to countries with more business friendly environments? Remember, they are multinationals, so they can divert this wherever they want.

    The problem here isn’t greedy multinational companies who care more about a buck than your job. The problem is a government that hasn’t a clue about international competitiveness, that has no problem sticking it to businesses that create jobs to generate short-term tax revenues that hurt us in the long-run, that has no business experience, and that has no interest in creating an environment that will nurture strong and competitive businesses to enhance our prosperity.

  4. If we all did business in the US and the US only, we would end this economic problem. Our slogan should be “Keep American dollars in America”. Our nation has become a consumption nation without producing anything.

    We have to move to quality versus low cost. In the long run, a better quality item, whatever that may be, is a better solution. I would much rather pay more for something that is better and will last longer than to continually buy the same thing over and over because it is cheap and doesn’t last.

  5. So, LEU, if Obama did just the opposite and eliminated taxes altogether for income generated overseas, as well as all enforcement and regulation for doing business overseas, that would encourage US companies to buy even more from overseas. Income earned there would be tax-free. Great. Now explain how that doesn’t eliminate jobs here in the US, as well as add to our trade and budget deficits.

    Making it less attractive to do business oveseas can only BOOST our domestic economy. You just spouted the knee-jerk conservative talking points with no logic associated to it at all. Kathy understands the economics of it. Why can’t you?

  6. LEU,

    Unfortunately, it’s not government intrusion, but the desire to maximize profits and minimize labor costs that prompts outsourcing (you want to read serious economic studies on this, not Rush Bimbo’s drivel). And a fair tax system should encourage the development of domestic ,rather then outsourced manufacturing. Unless, of course, we want to become a nation of burger flippers.

  7. Kathy- Outsourcing to an overseas independent supplier does not create any company income in the country where the work is performed. Since no income, no tax, even under the new rules. Therefore your objective will not be achieved.
    Not getting a tax credit for taxes paid to the government of the countries where a company’s foreign subsidiaries are located will result in double taxation of income. U.S. companies will be at a severe disadvantage vs. their foreign competitors. The logical conclusion will be to move their legal site of incorporation to a country that is more fair and supportive.

  8. I could get better business decisions from the local grade school then this administration.
    You’d think they were intentionally trying to wreck the American economy. What do his voters think now.

  9. Sam, Marty and Berl,

    Like it or not, we live in a global economy. Making the US isolationist in this environment will only backfire even more than past failed attempts. You apparently learned nothing from history, plus you are looking at this from an upside-down perspective.

    The US has the highest business taxes on the planet already, even before these tax increases. That makes goods and services produced in the US less competitive in the global economy. If you want us to be a nation of manufacturers instead of just consumers, how can we do that as an isolated economic entity? How can we do that when our non-competitive business tax policies place a large premium on price of US-made goods and services? If you truly want to encourage manufacturing, why do you not want to create a fair, level playing field for US companies with a tax policy that matches what every other nation on the planet offers their domestic companies, and that serves to encourage exports from the US instead of simply penalizing imports into the US?

  10. To my many fans, I offer this: If the US tax policies were reduced, (and if the FairTax were adopted, I might add) more companies would want to locate here. Right now, they don’t because the tax requirements are so oppressive (and this administration wants to increase them, go figure).
    As a businessman, if I can get cheaper labor for the same quality overseas – I’m going. As it is now, as an American company, I’m taxed on goods produced here and goods I manufacture overseas by the US as well. If a foreign company opens a plant here, they are only taxed on goods produced here.
    Berl – what’s wrong with making a profit? Isn’t that why people go into business in the first place? And I do like Rush, but I seldom get any drivel from him – I get that from reading your comments and others who want the government to take care of them.
    And Marty, I don’t see anything in Kathy’s comments to indicate she knows anything about economics other than to be a cheerleader for Nobama.

  11. LEU,

    As a businessman myself, I am not promoting isolationism. Globalization is real, and there is no reason to resist it. Yet, as a citizen-entrepreneur, I built a business that does not have to rely on the cheapest labour on the planet for survival. Just the opposite – a profitable and innovative US-based business that allows my fellow citizens to earn a decent living doing things they like, building products the entire world is willing to pay a fair price for.
    So, I don’t need the government ‘to take care of me’, but I want my government to do the moral thing and discourage greed at the expense of lost American jobs, while people running the companies exporting jobs get paid tens of times more than their foreign counterparts.

  12. Berl,

    As a fellow businessperson, I think you are dangerously oversimplifying the situation and drawing incorrect conclusions. Your premise that greed and immoral purposes are the root of offshoring of jobs is just plain wrong. I know – my company has been forced to build its products offshore. Yes, “Forced” not “Chose to because we’re greedy and immoral.” The real reason is that it is a matter of survival. We pay between 15-50% less to build the same product offshore, and the quality is almost always better. Our customers (many of which are international) simply won’t pay 15-50% more for a “made in USA” label on the product.

    So here are some real facts. We build electronic products. The cost to goods is overwhelmingly in the materials, not labor, whether we build in the US or offshore. In fact, the labor costs if we built domestically would only be around 10% of the total COGS, and they are reduced to the 5% range or so building offshore. The halving of labor costs simply isn’t the reason we offshore manufacturing because labor is such a small component of COGS to begin with. The majority of the savings from building offshore comes from a factory that can survive on much lower overhead rates, lower materials markup, lower gross margins, and that has better pricing on raw materials, and the main reason is lower taxes – in fact, 50% lower than combined federal+state taxes in the US. Translation: In order to earn a sustainable and fair after-tax profit, they can operate at much lower gross margins than a comparable US company. Unlike the US, their government sees the value in international tax competitiveness, and has set them up to build market share and bring jobs into their country.

    Surprise – the percentage of cost reduction we achieve going offshore is pretty much the same as the difference in percentage between statutory tax rates on businesses in the US compared to their country.

    And because they are in a country that actually wants them to flourish and be successful, they are able to attract customers from all over the world and build economies of scale. With that also comes purchasing power to negotiate better pricing on the raw materials, which they pass along to us. And they can afford to invest in the best technology to build a highly efficient factory that gives them a distinct competitive advantage compared to smaller domestic “boutique” factories. So this is a snowball effect that also benefits us.

    To say their workers get paid 1/10th what American workers make misses the point (and is actually quite exaggerated). These are workers that are the best paid in their town. They live very well, are very happy, and have great lives. Sure, they make less than a US counterpart in terms of absolute dollars. But relative to average wages in their country, they are very well off and bring in a great income. They are the same sort of loyal, hardworking, ethical workforce that you’d normally associate with the US. They really like what they are doing, have a strong work ethic, and are thrilled to have a high paying job.

    Another way to look at it. If we didn’t offshore, we wouldn’t have a business and wouldn’t create jobs for our fellow citizens in the US to design the products, market and sell them, and create value-added products and services using them. Given a choice of either creating no jobs in the US, or creating high-paying professional jobs adding value onto the work of our offshore factory, which is better for the US? I think the answer is pretty obvious.

  13. Berl,

    Also meant to say that since the savings we realize going offshore ultimately is driven by international tax competitiveness, that implies that further widening the already oppressively higher tax rates US companies pay relative to their international counterparts is exactly the wrong action to take. It will accelerate, not slow down, job loss offshore.

    If our government simply could dispense with party-line rhetoric and narrow-minded thinking on both sides of the aisle and really seek out pragmatic answers no matter where they came from, we would be so much better off. Every single openly socialist and communist country in the world tried protectionism and oppressive business tax rates, and they discovered they destroy jobs and drive business to friendlier environments. China now has 50% lower business tax rates than the US – and there are actually tax free business zones serving as incubators for businesses they see as important.

    These are countries that are founded on principles completely opposed to the idea of low taxes or creating an environment where the owners of those businesses make a profit. Yet they have the pragmatism to dispense with party-line dogma to find a solution that actually works in the real world. They have seen that profits aren’t the problem, rather they are just the logical consequence from a healthy company that is creating jobs and prosperity for their citizens. The problem isn’t that a business owner makes $1 in profits, the real problem is why didn’t they make $2? I know, you think this is greed. The truth is that to double profits, the business had to also double its spending, stimulating the economy and creating jobs.

    When will we see the light?

    Note this isn’t just a criticism of Obama and the Democratic party, the Republicans also are guilty of many of the same wrongs.

  14. Steve,

    Your point of high taxes is well taken, and we should make sure the taxes we pay are spent wisely. I am not advocating higher taxes, I am saying it again, the laws of the land should encourage businesses to create innovative products and jobs within the country, not offshore. Globalization is a force that drives mass manufacturing offshore, to lower wage countries. The industries in the developed world can only survive, if they produce products of higher quality, more advanced design, truly innovative than the mass-produced run-of-the-mill stuff built in 3d world countries. European car manufacturers don’t seem to suffer much from Japanese or Korean competition, because they have a product line people actually need. Boeing and GE build air planes and engines that are the best in the world, and are not moving their businesses to China. I am convinced that If GM did not kill the electric car 10 years ago, and worked on fuel efficiency rather than bigger and ever crazier Hummers, they would not be in such deep trouble today. True, routine assembly needs to move off shore, but we as a business owners have to make sure, we have more advanced products our workers will make in the US.

    We have to build the best in the world windmills, solar electric and nuclear power plants, etc. etc. if we don’t want to loose the leadership position in the technological world.
    And I fully agree that political posturing hurts, and politicians need to start solving real problems. I think your side of the aisle is not interested in this, they would rather harp about abortions, gay marriage and other nonsense, oh, and creationism, of course.

  15. It sounds to me like we are mostly preaching the same general idea, to keep jobs in the US. I think the lesson here is one that was taught during childhood; whether it’s more effective to discipline bad behavior or encourage positive behavior. Our government (probably all governments), past and present, has a tendency to discourage bad behavior in the form of laws and regulations, rather than offer positive reinforcement. People are generally good people, but we do make choices based on what will create the most positive effect on our personal environment.

    Our founding fathers figured out that people individually working in their own self interest creates the most prosperous and free society. Today this is known as greed. America has forgotten this history lesson. I like the idea of the fair tax because it makes government more like a business. Currently, while we all have to reduce expenses to ensure we continue to survive this economy, our government is raising taxes (their product) to fund their increased spending. The fair tax makes government more like eBay; they only make money if they facilitate the transactions of other businesses.

    Lastly, I do agree with Steve. The Republican Party needs to stop focusing on their social agenda and get back to work on what this country is based on, fiscal responsibility and limited government.

  16. Berl and Shane,

    Agreed, and as a Republican, I’m embarrassed many times by the social agenda radicals in my party tend to spread, just as radical Democrats surely must be spreading a social agenda that embarrasses the pragmatic moderates in your party. We all, as humans, deserve certain rights no matter our race, religion, national origin, sexual orientation, or any other divisive categorization that could be envisioned . As a country, we have never fully realized this dream, but no human or group of humans is perfect. So to point to the social policy failings of the Republicans and use that to discredit truly good ideas that we have on economics and business is not a reasonable position. That’s what “bi-partisan” means – take the best ideas, no matter where from, and use them to synthesize the best possible solution! And there are social policy triumphs from our party – Dr. Martin Luther King, Jr. was a Republican, after all, he and many other civil rights leaders were shut out of the Democratic party.

    I agree, let’s create god jobs in the US, and give a hand up to the developing world! But let’s also be honest with ourselves. US workers are the best, most skilled in the world. They command high wages, and rightfully so. So let the market sort out how to best harness this enormous talent to the best benefit of our economy. Hint: It isn’t in low-tech factories building commodity-level goods not needing our talent and abilities. Aircraft are a perfect example – Boeing does the design, and final assembly of the planes. But many parts and even entire subsections are built offshore where there is a better match of pricing structures with complexity of manufacturing and technology.

    As for the original topic of this discussion, the new Obama proposals amount to double taxation of US-based multinationals that puts us alone on the entire planet with such an outrageous tax policy. It effectively ties both hands behind the backs of our largest and most successful companies as they attempt to compete in the ever more difficult global market. This is not a political issue, rather it is one of basic prosperity and ultimately national security. How can anyone in either party argue that putting US companies at a significant competitive disadvantage in the increasingly globalized economy will really help us? I can see how the knee-jerk reaction of radical Democrats would be to like this, but those living in the real world realize that this carries many unintended consequences that far outweigh any potential benefits. You can’t just stop job loss offshore with protectionism, instead you have to find positive ways to harness the tremendous talent the US workforce offers.

  17. I happen to work for a company that does business on every continent involved in major manufacturing. The fact is that we make our products in those countries to be sold to people in those countries because we can’t affort to ship it internationally, and because local regulations that apply to us vary by country. Today, we make more profits in China, selling Chinese products to industrial customers located in China than we do in the US. The jobs we create in the US by making this money in China are CEO, CFO, Corporate Counsel, VP IT, Director of Marketing, a ton of accounting jobs, all high paying, knowledge based jobs. If we did not do business outside the US we would be 1/3 the size, much less profitable, and with far fewer corporate jobs. The taxes paid by the corporate people in our company in the US are HUGE. That my friends is the fact. We are a NYSE company paying dividends to shareholders in the US. We do not make huge profits, but we do pay huge taxes in many ways. So with Sarbanes Oxley, taxes, and most of our business outside the US, how long will it take to decide our corporate location (tax home) should be outside of the US. Not long. Companies are financial entities and will act to maximize financial return for shareholders and employees, government just happens to benefit as a byproduct of success. Absolutely nothing to do with politics. We will never know what hit us when it happens guys.

  18. Art, great post, and it’s sad that we seem to have not figured out the free market competitive forces also apply to international tax competition. I think many companies would like to be (or remain) headquartered in the US, but they are financial entities and have a duty to maximize return for shareholders. If that means moving to a different tax jurisdiction because our environment is so toxic, so be it. This should be really worrisome to us. Even before this new double taxation of offshore profits, the US already has the highest statutory business tax rates on the planet. Will this new double taxation be the tipping point that makes them finally move, taking the lion’s share of their tax payments with them?

    Free market forces will make other countries want to “steal” this tax revenue, and all they have to do to capture it is offer a slightly lower tax rate than the US does, which again isn’t at all difficult. We’re just making it easier for this to happen.

    We won’t know what hit us until it’s too late. Just like Washington state with Boeing HQ move a few years ago.

  19. In addition to taxes and higher labor, many companies are nailed by extreme governmental regulatory fees and costs such as EPA regs and legal fees to do business here. And soon, alot of the so-called “green” initiatives are going to penalize MFG companies even more.
    So, it’s not just for higher profits as some have indicated previously, that drive companies off shore – it’s the government.
    Why did Ireland cut its corporate tax rate down to about 13%? To lure successful companies- and lure them they did. Ireland was one of the few countries virtually untouched by the major recession symptoms because of this.

    Change you can believe in, indeed.

  20. langmuir blodget

    Here is a crazy one–you can’t get a tax credit for taxes paid to another country, in other words, double taxation. BUT you pay taxes on profits, not expenses. So if you have outsourced your expenses that isn’t counted, but if you are making sales in other countries it is. So Obama would have us curtail activities in other countries that bring profits into the USA (like a McDonalds franchise in Moscow).

    This is bad,
    lb

  21. LEU, You’re wrong about Ireland. They’ve had a banking crisis, and their unemployment is a few points higher than ours. On top of that, they have a much higher individual income tax rate at 20% under 42k Euros and 41% over 45k. They shifted the burden on the individual and on sales (VAT) taxes mostly at 21%, though some services are 13.5% and a few loser. Interest income is taxed at 25%. This presents the same problem for them that California is having. The tax base is mostly income and consumption. With the economy bad and unemployment high, both of those tax bases are down.

    And comparing the US to Ireland is like apples and oranges. We have a vast infrastructure of highways and utilities to support, much greater per capita. And a defense budget 8 time Irelands in percentage of GDP, and 498 times as great in real dollars. Yet our population is only 60 times as great. We have half as many people per sq. km. and 137 times the land mass. Comparisons should be done with the G8 countries and the OECD, not with Ireland.

    Steve, the US marginal corporate tax rates are not the highest, it is in fact about the middle of the G8. The G8 is made of of other industrialized nations similar economically to our own, Germany Japan, the UK, France, etc. Marginal tax rates are the rates actually paid after deductions, exemptions, loopholes, etc are figured in. You also can’t expect the US to have tax rates as 3rd or even 2nd world countries do, yet have the infrastructure and amenities of a first world country. Someone has to pay for our defense which eats up over 1/3 of the federal budget, and all those highways, etc. If we want to have tax rates like China or India, etc; we have to be willing to accept that standard of living. Almost 20% if India or China’s people don’t have access to safe drinking water.

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