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The White House is starting to tighten the noose around tax loopholes. Yet, one industry that supported his run to the White House, technology, is very concerned about the president's announcement.
According to Silicon Valley.com: "Silicon Valley companies are voicing alarm about a proposal that could require corporations to pay billions of dollars in U.S. taxes on foreign earnings," with the change in policy, if implemented having a "big impact on a number of U.S. corporations, especially tech giants such as Hewlett-Packard, Cisco Systems and Oracle, which report that overseas markets account for half or more of their sales."
Lobbyists for the tech industry noted that the potential changes are "the biggest issue where we disagree with the Obama administration," and that the situation was on the magnitude of "about a 20," on a Richter scale of 1 to 10.
Here's how the system currently works: "Currently, many big companies avoid paying U.S. taxes on revenue from foreign subsidiaries by reinvesting the money overseas, either by parking cash in various accounts or by plowing it back into foreign operations." But if Obama's plan is put into place, a company like Google "might have been required to pay an additional $1 billion last year on a tax bill that amounted to roughly $1.6 billion, according to a regulatory filing made by the company," while "Cisco lowered its effective tax rate by 16.1 percentage points through deferral, while paying income taxes of $2.8 billion in 2008. Oracle cut $569 million from its U.S. tax bill, which ended up at roughly $2.3 billion, for an effective tax rate of 29.5 percent."
U.S. companies often use this tax related nuance to their advantage. According to the Silicon Valley.com report: "While the standard U.S. corporate tax rate is 35 percent, HP reported that it cut 16.9 percentage points from its effective tax rate last year by paying lower foreign rates, instead of U.S. taxes, on income from overseas operations."
And while it sounds as if these big corporations are getting a free ride, they point out that the current system "gives them a level playing field on which to compete overseas against foreign companies, since many countries have a lower corporate tax rate than the United States. They argue that foreign sales are increasingly important in a global economy, and that healthy overseas operations help support domestic jobs."
On the other side "Critics of deferral have charged that it encourages companies to move jobs and shift income overseas, and that it deprives the government of significant tax revenue at a time when the recession and successive bailouts are putting huge demands on the federal budget."
So how much money is at stake? President Obama's goal is to raise some $210 billion from the changes in the tax code for corporations. According to Silicon Valley.com "In documents filed with the Securities and Exchange Commission, for instance, HP said it has accumulated $12.9 billion from foreign subsidiaries that it planned to reinvest "indefinitely" overseas. Cisco said it has $21.9 billion and Google $7.7 billion."
Conclusion
Is the honeymoon over between Silicon Valley and the Obama administration? And if so, what will the effect be on the economy, and on the political landscape?
It's too early to call this one, given the fact that it's still early in the process. But one thing is certain, politics is always about dividing the pie, and who gets what from whatever is available.
Here's what we know. The president wants $210 billion from U.S. companies doing business overseas, and at least those companies in the high tech sector are not happy about it. But, they're not alone. Other large, non-tech companies may also be affected. For example conglomerates such as Procter & Gamble, 3-M, and large international financial services firm may also be affected by this measure.
That means that there is the potential for a very large amount of unhappiness from corporate America that can be generated. Many of these companies were directly or otherwise generous donors to the Obama campaign, and have been vocal supporters of many of the president's initiatives.
In other words, the potential for a political backlash is certainly there. And it's only been 100 days.
Investors ignored the news and the stock market soared on Monday. Go figure.
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