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Software and computer companies such as Microsoft, Hewlett-Packard and Dell are gearing up to fight an Obama administration plan to curb offshore tax avoidance, reports The Times of India.
The $15.5 billion proposal in president Barack Obama’s 2011 budget targets what the Internal Revenue Service calls the growing problem of so-called transfer pricing. The technique allows companies to reduce their tax bills by transferring intangible property such as patents, trademarks and licenses to offshore subsidiaries.
The Business Software Alliance, a Washington-based trade group that represents technology companies, said it would "educate policy makers" on how the proposal would hurt US companies, jobs and the economy.
"The transfer tax on intangibles, which regulates how expenses and profits from overseas subsidiaries are recognised and taxed, would unfairly punish American firms vis-a-vis their foreign competitors," BSA chairman Robert Holleyman said in a statement.
"The US software industry and many other US businesses would pay a steep price in terms of global competitiveness." While the proposal represents less than 4% of the $400 billion in business-tax increases in the budget plan, the debate signals that companies are likely to resist Obama’s efforts to raise their taxes to help narrow deficits the administration estimates will total $8.5 trillion over 10 years.
In the past, lawmakers have been willing to take on offshore tax-avoidance techniques, though Senate Finance Committee chairman Max Baucus, a Montana Democrat, has said he would prefer to change such rules in the context of a broader taxcode overhaul.
Corporations engage in transfer pricing when they sell goods or services between subsidiaries. A globally accepted set of practices is meant to ensure that goods are priced so companies don’t inflate deductible expenses in high-tax countries and taxable income in low-tax ones.
Determining the fair market value of intellectual property is difficult, said John Samuels, the top tax lawyer for Fairfield, Connecticut-based General Electric, which gets more than half its sales from outside the US Transfer pricing "is the soft underbelly of the income tax," Samuels said last month. "Nobody understands it."
The Obama administration said this uncertainty creates opportunities for companies to shift their intangible assets to low tax countries. The proposal in Obama’s budget may also affect companies such as Coca-Cola, and Merck & Co, which report tax burdens below the top 35% US corporate rate through the use of intangible property and global operations.
