The end of low-tax countries

Low-tax countries hit at US crackdown plan

By Vanessa Houlder in London and Michael Steen in,Amsterdam. Financial Times

The proposed US crackdown on corporate tax avoidance has provoked an angry response from low-tax countries used heavily by the multinationals that are the target of the Obama administration's reforms.

The US administration, in unveiling the plan on Monday, highlighted the Cayman Islands, Bermuda, the Netherlands and Ireland. The US moves are also likely to be felt in Luxembourg, Switzerland and Singapore where profits reported by US subsidiaries often appear disproportionately high, given the size of those countries.

"We're not happy," said Jan Kees de Jager, the Netherlands' finance secretary. "We have a very transparent policy and we'll work with the US. I expect there'll be a clarification [from the US administration] and we'll not end up on lists like this in future, between Bermuda and Ireland."

Officials and tax experts pointed to the "very average" corporate tax rates in the Netherlands, which has corporation tax of 25.5 per cent, and noted that the country had successfully attracted foreign investors partly because of its location and educational achievements.

However, the Netherlands has no taxes on capital gains and low taxes on dividends, which can make it an attractive location for the subsidiary holding companies of foreign firms.

The Cayman Islands warned that the proposed changes could have unintended consequences. Alden McLaughlin, a minister, defended the islands' role in creating "efficiencies" that benefited business. "Blocking access to the Cayman Islands may have very real unintended negative consequences for international trade and the economies of large countries," he said.

Paula Cox, Bermuda's finance minister, said the announcement was not unexpected but added: "Bermuda will continue to put forth its views in an appropriate manner and at the appropriate level with decision-makers on Capitol Hill."

Critics of President Barack Obama's proposed reforms said the move would impede US multinationals' ability to compete abroad, as most other countries exempt foreign profits from tax. Companies also stepped up their lobbying against the plan by warning that US multinationals could become more vulnerable to takeovers by foreign competitors.

The reduced attraction of the US as a base for multinationals could make them more likely takeover targets, if the acquirer restructured the business to remove foreign subsidiaries from the US tax net, some tax experts said.

Catherine Schultz of the National Foreign Trade Council, which represents multinationals, said: "If there's a reasonable business and strategic reason for the investment anyway, taxes may very well be the factor that speeds the transaction along."

Dave Camp, the lead Republican on the House ways and means committee, said: "Ironically, what the president proposes will make it more likely that American companies will be bought by their foreign competitors."

The attention of international businesses focused on changes designed to "level the playing field" by restricting what the US administration described as tax advantages for creating jobs overseas. This would tighten up the system that allows US multinationals to defer paying US taxes on profits made on overseas investments. Under the reforms, multinationals would no longer be able to claim tax deductions on most foreign expenses, such as interest costs, until it repatriated earnings.

The reforms would also close loopholes that allow businesses to inflate tax credits for foreign taxes that can be deducted against US tax bills, and reform the "check the box" rules that allow entities to elect whether to be taxed as corporations or partnerships.