Obama corporate overhaul takes aim at tax havens

WASHINGTON (MarketWatch) � The Obama administration on Wednesday took aim at so-called corporate tax havens in a broad proposed overhaul that would lower the tax rate for companies and encourage job creation in the United States.

Treasury Secretary Timothy Geithner expressed disdain for the current business tax system, calling it �uncompetitive, unfair and inefficient� and saying it�s riddled with special favors.

He cited one example in which investors in a factory would pay a 32% tax rate while the rate for similar structures in the oil and gas sector would be 9%.

Click to Play Deductions would get the ax

Under President Barack Obama�s plan, the tax rate on manufacturers would fall to 25% or less, and some deductions would be cut as well. (Saul Loeb: AFP/Getty Images.)

The White House�s plan, coming as the presidential election season swings into high gear, would eliminate �dozens� of tax loopholes and use the savings to lower the top income-tax rate for corporations to 28% from 35%.

To stop multinationals from hiding profits in low-tax countries, the administration would also set out the rate for the new minimum tax on foreign earnings.

Further, it would simplify and cut taxes on small businesses.

All of the Republican presidential candidates have called for corporate tax reform. For instance, Mitt Romney, the former governor of Massachusetts, has proposed a 25% top corporate tax rate.

A �key test� of any reform would be whether it improved incentives for investing in the United States, Geithner said. But Treasury officials would not detail a specific minimum rate for foreign earnings.

�The minimum tax rate would be designed to balance the need to stop rewarding tax havens � with the goal of keeping U.S. companies on a level playing field with competitors,� the department said in its report.

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The administration said that at the moment, U.S multinationals are able to defer taxes on overseas income until they repatriate it to the U.S.

Cisco Systems Inc. CSCO , for example, had only $5 billion of its $46.7 billion in cash and equivalents at the end of its fiscal second quarter available in the U.S.

This gives the companies �significant opportunity� to reduce taxes by shifting profits to low-tax countries.

According to the report, U.S. corporations in Bermuda accounted for 646% of the country�s gross domestic product and 547% of the GDP for the Cayman Islands.

The proposal would also try to reduce the ability of U.S. firms to shift income derived from intellectual property overseas.

To spur U.S. manufacturing, companies would no longer be allowed to claim tax deductions from moving their operations overseas. The plan would also give a tax credit for the expenses of moving operations back into the country.