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Microsoft Issues Jobs Threat To Obama Over Tax Plans

by Mike Godfrey,, Washington

09 June 2009

Microsoft CEO Steve Ballmer has warned that he will move part of the software giant’s operations overseas if President Obama succeeds in his plan to change the corporate income tax deferral rules.

Ballmer told Bloomberg News that the company would be “better off taking lots of people and moving them out of the US” if the proposed international tax reforms are put into place, noting that US taxes already make it “more expensive” to employ workers in the US.

Under current tax law, multinationals can immediately deduct foreign investment costs against US taxes, but defer paying tax on the overseas profits that result until they are repatriated to the United States. This, according to Obama, gives companies an incentive to invest in foreign countries and, to coin a favourite phrase of his, “ship jobs overseas.”

Under a plan released by the Treasury last month, the deferral rules would be changed so that – with the exception of research and experimentation expenses – companies cannot receive deductions on their US tax returns supporting their offshore investments until they pay taxes on their offshore profits. This provision would take effect in 2011, and the Treasury expects that an additional USD60.1bn in tax revenues would be raised from 2011 to 2019 as a result.

However, as Ballmer’s threat highlights, these reforms may actually achieve the opposite of what Obama ultimately intends – increasing domestic investment – because, facing the prospect of double taxation, some companies could decide that it would be more cost effective for them to simply stay offshore.

“This plan will reduce the ability of US companies to compete in foreign markets, which will not only reduce jobs, but will also cripple economic growth here in the United States,” said John J. Castellani, President of the Business Roundtable, in response to the Treasury’s announcement. “It couldn’t come at a worse time.”

“The United States is the only major industrialized country which double taxes the overseas earnings of our companies,” US Chamber of Commerce Chief Economist Dr. Marty Regalia has said. "Since other countries don’t subject their companies to double taxation, US companies need deferral to stay competitive in the global marketplace.”

Business groups have expressed frustration that the Obama administration is missing an opportunity to address US competitiveness and boost investment by cutting the rate of US corporate tax, which, at 35%, remains the second-highest amongst the advanced nations, behind Japan.

Contrary, perhaps, to public perception, large corporations in America also contribute substantial sums in other taxes, in addition to corporate tax. According to PricewaterhouseCooper's Total Tax Survey, released earlier this year, the 40 companies participating in the survey remitted USD94bn in taxes in the year to March 31, 2008, of which USD28.5bn were federal and state corporate income taxes. These companies employed 1.6 million US workers and paid USD122bn in wages and salaries. US corporations also serve as unofficial tax collectors for the government, collecting and remitting USD169 in sales, excise, withholding and other customer and employee taxes for every USD100 of corporate income tax payments.

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