Tax plan would send jobs offshore, Ballmer says

Microsoft CEO Steve Ballmer said the software company would move some employees offshore if Congress enacts President Obama's plans to impose higher taxes on U.S. companies' foreign profits.

"It makes U.S. jobs more expensive," Ballmer said Wednesday. "We're better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S."

Obama on May 4 proposed outlawing or restricting about $190 billion in tax breaks for offshore companies over the next decade. Such business groups as the National Foreign Trade Council, the U.S. Chamber of Commerce and the Business Roundtable have denounced the proposed overhaul.

U.S. tax rules let companies defer paying corporate rates as high as 35 percent on most types of foreign profits as long as that money remains invested overseas. Obama says he wants to end such incentives to keep foreign profits tax-deferred so that companies would invest them in the U.S.

Microsoft reported an overall effective tax rate of 26 percent for 2008 in its last annual report. "Our effective tax rates are less than the statutory tax rate due to foreign earnings taxed at lower rates," the report said.

Barry Bosworth, an economist in Washington, D.C., at the Brookings Institution research center, said many software companies such as Microsoft have exploited tax and trade rules in the U.S. and other countries to achieve a low overall tax rate.

Typically, he said, a company like Microsoft develops a product like Windows in the United States and deducts those costs against U.S. income. It then transfers the technology to a subsidiary in Ireland, where corporate tax rates are lower, without charging licensing fees. The company then assigns its foreign sales to the Irish subsidiary so it doesn't have to claim the income in the U.S.

"What Microsoft wants to do is deduct the cost at a high tax rate and report the profits at a low tax rate," Bosworth said. "Relative to where they are now, the administration's proposals are less favorable, so there will be some rebalancing on their part."

Ballmer was one of 10 U.S. software-company executives pushing back against the tax proposals in meetings Wednesday with White House officials including Jason Furman, deputy director of the National Economic Council, and the heads of congressional committees such as House Ways and Means Committee Chairman Charles Rangel, D-NY.

Among other things, Obama proposed limiting expense deductions such as those for employee compensation when companies defer U.S. tax on foreign profits.

In a roundtable discussion Wednesday, Ballmer, Symantec Chairman John Thompson and the heads of smaller companies such as privately held Bentley Systems, an Exton, Pa.-based maker of engineering software, said such policies would hurt domestic investment, reduce shareholder value and increase the cost of employing U.S. workers.

Ballmer said the deduction limits for companies that defer tax on foreign profits would raise the cost of employing U.S. workers. Fiduciary responsibility to shareholders would require Microsoft to cut costs, he said, meaning many jobs would be moved out of the country.

Microsoft employed 95,029 people worldwide as of April 21, with 56,552 based in the United States, according to the company's Web site.

The company announced it was laying off up to 5,000 people in January while hiring some new workers; the company has shed about 1,000 jobs since then, spokesman Lou Gellos said.

Ballmer estimated that higher taxes under the proposal would reduce profits for companies that comprise the Dow Jones industrial average by between 10 and 15 percentage points.

Thompson, of Symantec, the Cupertino, Calif.-based maker of Norton anti-virus software and similar tools, said software companies are frustrated by being called tax cheats and compared with companies that moved their headquarters to low-tax countries such as Bermuda.

Thompson called the Obama proposals "counterintuitive" to the administration's other stated goals of fostering an innovation-oriented economy.

"It is a little bit ironic that most of our most significant trading partners and partners globally have taken the tack that they'll reduce corporate tax rates to stimulate economic growth and not raise corporate tax rates," Thompson said.

The roundtable was organized for Bloomberg News by the Business Software Alliance, a Washington, D.C., trade group coordinating the executives' meetings with policymakers.