On February 2, 2015, President Obama and the U.S. Treasury released the Administration’s Fiscal Year 2016 Revenue Proposals – the “Greenbook”. The Greenbook contains extensive proposals, including many that target U.S. international taxation. If enacted, some of these proposals would have a tremendous impact on U.S. taxpayers doing business overseas, including the demand on resources to comply with the changes.

Enactment of proposals for tax reform has been elusive over the past several years, despite apparent relative consensus that reform is needed. These proposals represent a continuation of the on-going dialogue between the Administration, Congress and U.S. taxpayers. Over several of our upcoming blogs, we will take a quick look at some of these proposals.

Proposal Topic: “Provide tax incentives for locating jobs and business activity in the United States and remove tax deductions for shipping jobs overseas”

This incentive fits well in the current national dialogue about the domestic consequences of outsourcing of jobs overseas and would appear to bolster the trend in “on-shoring” or “insourcing”.

What is the proposal?

• Creation of a new general business credit equal to 20% of eligible expenses related to “insourcing” a U.S. trade or business; and
• Disallowance of deductions for expenses incurred in connection with “outsourcing” a U.S. trade or business.

A carrot and a stick. Upon a quick reading, perhaps a very large carrot and very large stick. However, a little more inspection offers a more limited view:

• “Eligible expenses” and “deductions for expenses paid or incurred in connection with outsourcing” are not well defined. However, it seems that these terms are intended to be limited to expenses paid or incurred in connection with the actual relocation of the trade or business. Furthermore, various expenses that one might expect to be included are not (e.g., certain severance, capital expenditures, other assistance to displaced workers); and
• The benefit of the credit and the detriment of the disallowed deductions would be tied to movement of jobs into, and out of, the U.S. There is no practical guidance provided as to how this may be measured or determined.

Potential impact of this proposal

This proposal is a carryover from the prior fiscal year Greenbook. In the end, if this proposal is adopted and implemented, the Devil will be in the details as to how incentivizing it is. This may depend on the magnitude of the forecasted benefit when weighed against the business costs of change and the administrative effort required to claim the benefit. For a business that is considering a move one way or the other, however, this could prove to be a deciding factor.

To learn more about how you may be affected by this or other significant international developments, contact a member of the KLR Global Tax Services Group. Stay tuned for future blogs on the Greenbook proposals.