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Uncovering the Offshore 'Tax Breaks'

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Sure, I was aware that President Barack Obama, before he was elected, often included in his campaign speeches a statement about ending tax breaks for U.S. companies that send jobs overseas. I chalked it up as so much political rhetoric and, based upon their lukewarm reaction to it, so did services providers in India, the top offshore destination for North American companies.

 

I wrote as much back in September. Since then, however, the economy has continued to spiral downward, and there's a new and alarming report about U.S. job loss nearly every day. Indian companies, apparently feeling that worsening economic conditions may give Obama the political backing he'll need to actually change the tax code, are now pumping up their own rhetoric, saying such a move would punish American business.

 

So what are these mysterious tax breaks that are causing so much ire, here in the United States and in countries where companies like IBM have a big offshore presence? I found references to two practices that may be among those under fire.

 

The Internal Revenue Service has apparently been considering rules to address a practice called transfer pricing, in which multinational companies are able to reduce their U.S. taxes and keep profits offshore in low-tax jurisdictions through their calculations of the prices associated with transferring goods and services between their divisions. According to an International Herald Tribune story, some companies abuse the practice by undercharging or overpaying their foreign subsidiaries for goods and services. It's apparently been on the IRS' radar for years. GlaxoSmithKline agreed in 2006 to pay the IRS $3.4 billion and remove its claim for a tax refund of $1.8 billion to resolve a dispute over whether its American subsidiary had overpaid its British parent company to reduce its profits and thus its share of U.S. taxes.

 

During his campaign Obama came out against a practice called deferral, which allows U.S. companies to delay paying taxes on overseas earnings until those profits are returned to the United States. Sen. John Kerry, D-Mass., similarly criticized the practice during his 2004 presidential campaign, according to a Cleveland.com article. Experts quoted in the article hedge their bets on whether a rule eliminating deferral would boost or burden the U.S. economy. Some say it would put multinational companies at a disadvantage when competing against companies based in countries with lower tax rates or deferral provisions of their own.

 

It's not as if tax breaks are the only reason -- or even a primary one -- for companies with overseas operations. Many are looking to tap into markets like India and China, which look a lot more lucrative these days in comparison to the United States. Eliminating breaks won't have much of an impact on huge multinationals but could affect small- and mid-size companies, writes IT consultant Paul Massie in a commentary on the Gerson Lehrman Group's Expert Network. Still, concerns over tax regulations were one reason that CFOs surveyed by BDO Seidman said they'd give the U.S. the nod over offshore locations for future outsourcing efforts.

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