SCOTLAND'S economy could be dealt another blow as a result of a major tax dispute on the other side of the Atlantic between big business and President Obama.
US technology giants, more used to engaging in fierce global battles for market share, have closed ranks to drive their digital tanks onto the White House lawn to protest against planned changes to corporation tax. Obama's proposals would lead to a g
lobal fallout in the UK, Europe and further afield, as blue-chip multinationals lead the charge against attempts to claw back significant chunks of profits they have racked up overseas.
IT companies such as Microsoft, Hewlett-Packard, IBM, Cisco, Oracle and Dell – each with sizeable operations in Scotland – could see their foreign earnings significantly cut. There is a danger that Obama's plans could lead to US companies scaling back their overseas operations, including those in Scotland, or halting expansion plans. This could wipe billions of future investment from the UK economy.
Obama announced the proposal last week aimed at closing tax loopholes exploited by Fortune 100 companies that park their earnings abroad in subsidiaries, or banks, to avoid paying higher US taxes. The crackdown would raise up to $210 billion over a decade from overseas tax shelters if Congress is persuaded to back the groundbreaking proposals.
Companies would no longer be able to deduct expenses for their overseas operations until they have paid tax on their profits, or claim big deductions by inflating the amount of foreign tax they have paid.
Many technology companies operate extensively overseas, with the bulk reporting that half or more of their revenues come from abroad. This reflects the extent to which they dominate the global sector in which they compete.
"There are many companies out there that legitimately use offshore facilities as a way of avoiding tax liabilities," says Charles Scott, whose first encounter with Silicon Valley was during the height of the Nineties dotcom boom.
Scott is now technical director with Edinburgh-based Quorum Networks Resources, working with Microsoft as a gold partner, and whose sister company Sbi is a leading IT consulting group in Bermuda.
"The fear now with this move by Obama is that they will finish up being taxed twice on overseas assets. Worse still, it could very likely lead to UK and other European markets being less attractive to American company investors and that we suffer from a reduction in their efforts over here."
Scott warned that the big danger is the tech giants pull back their operations entirely into the US.
"They will ask themselves 'why be here?' Then the likes of Scotland could be left, typically, with a tech multinational running a tiny branch office, a locally hired sales force and precious little else."
One lobbyist, Carl Guardino, chief executive of the Silicon Valley Leadership group, an industry trade association, led a 50-strong taskforce of Valley-based executives to Washington last week.
He pointed out to legislators and politicians that along with revenues, tech companies' activities outside the US also account for many existing and new jobs overseas.
Guardino described the Obama move as "like an earthquake for hi tech.
"On a Richter scale of 1-to-10, this would be a 12. This is a $60bn hit on American employers that their foreign competitors won't feel," he said.
Obama's plan is designed to bring more tax revenues to the US Treasury and create more job opportunities at home by discouraging efforts to save earnings by seeking lower tax rates overseas.
It is estimated that each tech multinational took billions more in extra earnings as a result of using foreign banks offering lower tax rates.
Typical is Hewlett-Packard, which had $12.9bn in tax-free cash at the end of its last financial year, while Microsoft had $7.5bn, according to the Financial Times' review of their Securities and Exchange Commission (SEC) filings.
US companies can defer taxes indefinitely on the profits they claim have been earned overseas until they repatriate that money back to the US, where the tax rate is 35 per cent, but due to various allowances is lowered to around 22 per cent.
A White House spokesman claimed the US tax system is "rife with opportunities" to avoid paying taxes through offshore tax havens, and that the crackdown on corporate tax loopholes would also create more US jobs.
The proposed new tax rules would discourage the outsourcing of US jobs overseas. They would also limit deductions for expenses on hundreds of billions of dollars in foreign-earned income, unless the money is brought back to the US and subjected to the 35 per cent corporate tax. Tax lawyers agree the proposals would make overseas operations more expensive.
Business groups, including the US Chamber of Commerce, have pointed out that the American corporate rate of 35 per cent is much higher than the average rate of 24.1 per cent in industrialised countries.
The Cayman Islands Financial Services Association has written to Barack Obama to express its concerns over his planned tax changes. It says: "We are ... gravely concerned about your remarks regarding the Cayman Islands, which erroneously suggest that the subsidiaries of US corporations operating in Cayman are engaging in tax fraud merely because they are registered to do business here. Nothing could be further from the truth."
US corporations argue that a system of deferral is needed for them to compete in the global marketplace, especially since most other such nations do not tax foreign profits of domestic companies.
Technology is not the only sector affected, as a broad swathe of companies including banking and hedge funds and the big pharmaceutical companies would also be subject to the new tax rules.
Drew Lyon, a principal at PricewaterhouseCoopers, said: "It is really hitting most Fortune 100 companies that depend to a great deal on growth of foreign markets for their total earnings."
It is those overseas markets that are now holding their breath. All they can do is wait and see how damaging the Obama tax plan will be to commercial relationships between them and the US multinationals they depend on so much.
