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Obama's Tax Proposal Shakes Silicon Valley: On a Richter Scale of 1 to 10, 'About a 20'

Ann All

Up until now, much of the tech industry has embraced President Barack Obama. Techies seemed to appreciate his groundbreaking, tech-infused approach to campaigning, a nine-page technology position paper he introduced during the campaign, his BlackBerry addiction and that he named the nation's first CTO, along with his appointment of groups to help him determine national tech priorities and to figure out ways to boost research-and-development spending.

 

Not to mention, at least some tech companies appear to be in a good position to receive government stimulus funds.

 

But at least some big tech players may now feel more like throttling Obama than embracing him, thanks to his proposal to eliminate three popular tax-avoidance methods employed by companies with offshore operations, including tech giants such as Cisco, IBM and Microsoft.

 

Bloomberg runs down the methods targeted by Obama: "check the box" rules, and deferred foreign profits and transfer pricing, both of which I wrote about in March. In theory, this will help the federal government raise some $190 billion over the next decade. According to an administration statement cited in the article, U.S.-based multinationals paid about $16 billion in U.S. taxes while earning about $700 billion offshore, or an effective tax rate of about 2.3 percent. The top marginal tax rate for U.S. companies is 35 percent.

 

More flashpoint numbers from the article: General Electric has deferred tax on a cumulative $75 billion over the past decade, according to filings. HP has deferred U.S. tax on $12.9 billion since 2005. Microsoft has accumulated $7.5 billion that has never been taxed by the United States. AIG, a favorite symbol of corporate hubris, deferred $3.9 billion in taxes on its foreign earnings in 2008, the same year it took federal bailout funds.


 

Not surprisingly, companies' take on the issue is that the proposals, if passed, would raise their cost of operations and put them at a disadvantage when competing against overseas rivals based in countries with lower corporate tax rates, according to SiliconValley.com. Silicon Valley companies will be among those lobbying against the proposals. Said Carl Guardino, CEO of the Silicon Valley Leadership Group:

On a Richter scale of 1 to 10, this is about a 20.

The group is sending representatives to Washington this week, to discuss the deferral proposal and several issues with federal officials and congressional leaders. One possibility for compromise: a proposal that would allow multinationals to repatriate overseas earnings at a reduced tax rate. According to SiliconValley.com, Sen. Barbara Boxer, D-Calif., backed legislation earlier this year that would have temporarily reduced the tax rate to 5.25 percent for overseas earnings repatriated within a year. The bill was dropped when opponents said a similar tax holiday in 2004 yielded few U.S. jobs.


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