In turn, Obama said, the government would offer a tax cut to companies that do their research and development in the United States. And that will “jump-start job creation,” he said.
Among the changes Obama wants is to require U.S.-based multinationals to defer taking deductions on expenses related to their foreign operations until they bring back the profits to the United States and pay U.S. income tax on them.
Doing so would reduce some of the tilt in the tax code that makes it more advantageous for companies to invest abroad, said one Democratic aide on Capitol Hill.
But U.S. tax policy is not the only factor a company weighs in deciding whether to invest beyond the borders.
For instance, companies go abroad primarily to sell products abroad, said Rosanne Altshuler, co-director of the Tax Policy Center. In 2006, she noted, only 10.5% of sales of U.S. controlled foreign subsidiaries were sent back to the United States.
“And there are a lot of advantages to having the production close to the place of final sale,” Altshuler said. One is lower transportation costs.
Indeed, total manufacturing cost is the most compelling reason to move operations abroad, and countries actively woo companies with tax holidays and other incentives, said Sang Kim, a partner in international tax practice of the global law firm DLA Piper. Kim’s practice doesn’t lobby, but DLA Piper does and a company representative said it might do so on Obama’s proposals.