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Obama Goes On International Tax Warpath In Maiden Budget

by Mike Godfrey,, Washington

02 March 2009

United States President Barack Obama has made good on his promise to crack down on corporate tax avoidance by proposing in his budget for 2010 a tough new enforcement campaign directed at taxes owed both domestically and abroad.

Despite the scale of Obama's first budget, projecting as it does budget deficits of more than a trillion dollars this year and next, its content is less of a surprise, containing his signature tax and spending priorities. For example, the budget proposes that the Making Work Tax Credit would become permanent, and that various Bush era tax cuts from 2001 and 2003 would be allowed to expire at the start of 2011 for taxpayers earning more than USD250,000 annually.

The budget also includes an increase in funding for the IRS as the new administration sets about closing all those loopholes that it believes allow multinationals to play fast and loose with the US tax code and deplete the Treasury's coffers.

"The scope, complexity, and sheer magnitude of the international financial system pose significant enforcement challenges for the IRS in carrying out its tax administration responsibilities," the budget summary document notes.

"The 2010 Budget includes funding for a robust portfolio of IRS international tax compliance initiatives, and sustains and improves IRS efforts to narrow the annual tax gap of over USD300bn," the summary adds.

Last December, Internal Revenue Service Commissioner Doug Shulman warned that the agency is ratcheting up its efforts to police the US international tax system and focusing its compliance efforts in three main areas, including transfer pricing, withholding taxes and hybrid entities.

According to Shulman, US-based corporations more than tripled their foreign profits between 1994 and 2004, rising from USD89bn to USD298bn, with 58% of that profit earned in low tax or no tax jurisdictions. Meanwhile, multinational enterprises increased from 3,000 in 1990 to more than 63,000 in 2007 and the value of foreign tax credits being claimed increased by more than 25% in just two years from 2005 to 2007. "And this gives pause to some US taxpayers and policymakers who want to be sure that these corporations are paying their fair share at home," he said at the time.

Speaking at a tax conference on the eve of the President's budget announcement, Shulman reiterated that the IRS will pursue international tax avoidance and evasion, particularly of the offshore variety, with a renewed vigour.

"That pressure will continue under my watch," he told a gathering of international tax practitioners at the Tax Council Policy Institute conference.

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