Insight: How Treasury's tax loophole mistake saves companies billions each year

Thu May 30, 2013 8:55pm EDT
 
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By Kevin Drawbaugh and Andy Sullivan

WASHINGTON (Reuters) - As the U.S. economy crumbled in early 2009, President Barack Obama offered a plan that he said would save American jobs: a crackdown on corporate tax loopholes that encourage companies to send profits abroad to avoid paying billions of dollars in U.S. taxes each year.

Tax lobbyist Ken Kies was not worried. A decade earlier, he had led a fight to preserve a key loophole - known in Treasury Department shorthand as the "check the box" rule - when another Democratic president, Bill Clinton, had tried to kill it.

"I told my clients, 'Don't sweat this. This is never going to happen,'" recalled Kies, who has advised corporate giants Microsoft and General Electric on the issue.

Kies was right.

Business groups rose up against Obama's plan, arguing that it could damage U.S. businesses already threatened by the weak economy. Democrats in Congress balked, Obama dropped the idea and the loophole survived.

The story of the "check the box" loophole, which allows U.S. companies to choose for themselves how to classify their subsidiaries for tax purposes, and a companion policy known as the "look-through" rule, shows how Washington bureaucrats, lobbyists and politicians have worked together — sometimes wittingly - to save money for American corporations and deprive the federal government of billions in tax revenue each year.

What began in 1996 as an effort by the Treasury Department to simplify the U.S. tax code mistakenly ended up as a massive tax loophole for corporate America, which seized upon it and has never let go.

Besides fueling an explosion in earnings that U.S. companies keep abroad - now more than $1.8 trillion, the Commerce Department estimates, double the amount from less than a decade ago - the loophole has become a symbol of how difficult it can be to repeal a tax benefit once it becomes entrenched.   Continued...

 
Apple CEO Tim Cook (C) appears before a Senate homeland security and governmental affairs investigations subcommittee hearing on offshore profit shifting and the U.S. tax code, on Capitol Hill in Washington, May 21, 2013. REUTERS/Jason Reed