Obama proposes minimum tax on foreign profits

In a bid to discourage American multinational companies from moving their assets abroad and parking their profits there, the Obama administration has proposed a new minimum tax rate on foreign profits.

Currently, US companies with foreign subsidiaries may reduce their federal tax bill in a variety of ways, including by deferring the federal tax they owe on their foreign-made profits until they bring that money back to US shores.

By contrast, President Barack Obama’s proposal would require companies with foreign income in low-tax countries to pay the minimum US tax rate on that income when it’s earned. If the company pays income tax to the host country on those profits, it will get a foreign tax credit.

Obama’s plan would also remove the tax deduction for moving expenses that US multinationals get when they move operations abroad. Conversely, US multinationals that move operations back to the United States would get a 20 percent tax credit.

The proposal on foreign profits is a part of the Obama administration’s plan to overhaul the corporate tax code.

The main proposal for reform would slash the corporate tax rate to 28 percent from 35 percent and pay for the reduction by eliminating “dozens” of business tax breaks. There are currently more than 130 on the books.

The plan would seek to ensure that the effective tax rate paid by manufacturers does not exceed 25 percent. Currently, the average tax rate for manufacturers is 26 percent, according to senior administration officials.

The last time the United States embarked on major tax reform was in 1986, when the economy, international trade and technologies were vastly different.

“The current tax code was written for a different economy in a different era. It needs to be reformed and modernized,” Treasury Secretary Tim Geithner said Wednesday.