Brokerage industry is up in arms about Obama plan to get rid of offshore tax breaks

The brokerage industry is angry about President Obama's efforts to eliminate certain tax breaks for U.S. corporations that do business -offshore.

Specifically, the industry is fretting about proposed changes to a law that allows companies to defer paying U.S. income taxes on revenue from overseas subsidiaries for as long as they reinvest the money abroad.

While not eliminating the deferral, Mr. Obama would modify the law so that companies no longer would be able to take an immediate deduction on their U.S. income taxes for expenses linked to their overseas operations.

The proposal would raise an estimated $60 billion in revenue over the next decade.

Many financial services companies operate subsidiaries outside the United States.

“We're very concerned about it,” said Shahira Knight, managing director for tax issues in the Washington office of the Securities Industry and Financial Markets Association, which is also based in New York.

“Deferral really goes to the heart of making sure our U.S.-based companies can compete overseas,” she said. “To the extent that you limit deferrals, it's going to affect our competitiveness in foreign markets.”

LONG LIST

The proposal was among a laundry list of corporate tax proposals put forth by Mr. Obama to generate nearly $209.9 billion in revenue between fiscal 2010 and fiscal 2019.

U.S. companies that do business overseas through foreign subsidiaries don't have to pay taxes on profits earned by those subsidiaries until the company repatriates the profits back to the parent company in the United States. As long as profits are reinvested in the subsidiary, the company generally pays tax to the country in which it is operating, but it doesn't pay tax to the U.S. government.

Without the tax deferral, U.S. subsidiaries would pay different tax rates than competitors in foreign markets, Ms. Knight said.

Under the proposed tax change, U.S. companies wouldn't have to repatriate profits from all foreign operations. They would have to repatriate only the foreign profits that are associated with the expenses being deducted.

Mr. Obama and other Democrats have been critical of U.S. companies that create jobs in other countries and pay less in taxes to the U.S. government.

But the U.S. financial services industry is “not shipping jobs overseas,” Ms. Knight argued.

“If we can't compete in a foreign market, that means we're ceding that market to our foreign competitors,” she said.

“But it doesn't mean we're going to create a job here instead,” Ms. Knight said. “We can't serve a customer in Germany by creating a job in Florida.”

A spokesman for the Department of the Treasury declined to comment on Ms. Knight's remarks.

But in a written statement outlining the international tax plan, Treasury Secretary Timothy Geithner said: “We believe in a level playing field, but we currently have a tax code that gives businesses that invest and create jobs overseas a competitive advantage over those who invest, and creates jobs at home. We are taking the next step in creating fairness in our economy by ending the indefensible loopholes that allow companies to avoid paying taxes while millions of hardworking families and small businesses pay their fair share.”

Other groups also are concerned about the foreign tax provisions in the budget proposal sent to Congress. “By saddling American companies with increased costs and putting them at a competitive disadvantage, ultimately, that could lead to more job losses,” said Tom Quaadman, executive director of the U.S. Chamber of Commerce's Center for Capital Market Competitiveness in Washington.

A provision similar to the one in the Obama budget was included by House Ways and Means Committee Chairman Charles Rangel, D-N.Y., in a tax bill he introduced in the last Congress.

E-mail Sara Hansard at [email protected].