Foreign Profits Threaten Tax Deal

Business groups want to eliminate most taxes on overseas profits.

President Barack Obama’s belief that the U.S. tax system pushes jobs overseas and Republican assertions that multinational companies are disadvantaged will make compromise on a new corporate tax code difficult.

Even as business groups and Republican lawmakers praised the administration’s call yesterday for a lower corporate tax rate, they insisted that ending most taxes on foreign profits is an essential part of what ought be a larger overhaul of the tax code.

The gulf between the two sides on international taxation will be difficult to bridge if and when the Obama administration and Congress begin serious negotiations on the tax code.

“That’s oceans away, just miles and miles away,” said Bruce Thompson, a Washington tax lobbyist at Van Scoyoc Associates. “Just two different concepts.” His clients include a coalition of companies that market and sell fuel with 85 percent ethanol.

U.S. companies now owe U.S. taxes on all their profits. They can claim credits for taxes paid to foreign governments and defer U.S. taxation until they repatriate the money.

The administration wants to retain that “worldwide” tax system. The administration proposal would make it harder for companies to defer income. In addition, the new framework announced yesterday mentions adding a minimum tax on global income, without providing details on how the tax would work.

“By imposing a minimum tax, you’re creating winners and losers from the get-go,” said Dorothy Coleman, vice president of tax and domestic economic policy at the National Association of Manufacturers in Washington, whose members include Caterpillar Inc. and Devon Energy Corp.

Companies operate outside the U.S. to serve overseas markets, and “it is discriminating against companies depending on where they locate,” she said.

In contrast to the administration’s plan, a territorial tax system like the one proposed by Republican Representative Dave Camp would exempt most foreign profits from U.S. taxation. The proposal by Camp, who heads the House Ways and Means Committee, includes options to prevent companies from shifting profits out of the U.S.

Multinational corporations have been urging Congress to adopt a territorial system because they say it would let them compete in growing foreign markets without a residual home-country tax that other companies don’t face.

“How do you go from a territorial system on the Camp side to the worldwide and figure out a way to meet in the middle?” asked Catherine Schultz, vice president for tax policy at the National Foreign Trade Council, which advocates an open world economy.

 

Unyielding Position

In the corporate tax framework released yesterday, the White House and the Treasury Department emphasized their opposition to a “pure territorial” system.

“If foreign earnings of U.S. multinational corporations are not taxed at all, these firms would have even greater incentives to locate operations abroad or use accounting mechanisms to shift profits out of the United States,” the administration said in its document. “Furthermore, such a system could exacerbate the continuing race to the bottom in international tax rates.”

The divide on international taxation is one of many issues that would need to be bridged as part of a tax code rewrite. The administration and Republicans also disagree on the total amount of revenue that should be raised; on how to treat business owners who pay taxes through the individual tax code; and on which tax breaks to retain in a new system.

The administration’s framework called for dropping the business tax rate to 28 percent and removing tax breaks to help offset the revenue loss. Obama would retain tax breaks for corporate research, domestic manufacturing and renewable energy.

The president’s plan also would raise revenue by lengthening depreciation schedules, limiting the deductibility of interest and changing how large partnerships are taxed. None of those proposals included details on how they might work or how much money each one would contribute toward offsetting the rate reduction.

The outline includes provisions that Obama has tried to advance in his budgets for several years, including ending oil and gas tax breaks, eliminating the last-in, first-out accounting method and taxing the carried interest of private equity fund managers as ordinary income instead of capital gains. He would ask Congress to let $250 billion of expiring business tax breaks lapse or be offset with revenue elsewhere.

Camp favors a corporate tax rate target of 25 percent. The Michigan Republican hasn’t said what tax breaks he would eliminate to offset the cost of a rate reduction. The remaining Republican presidential contenders have proposed top corporate tax rates of between 12.5 percent and 25 percent.

 

Common Ground

Despite the differences between the Obama and Camp proposals, there is common ground, said Edward Kleinbard, former chief of staff of the congressional Joint Committee on Taxation.

He called the administration’s plan “a little skinny on detail” and said there are conceptual differences, particularly on international taxation.

Still, Kleinbard said, “If you line it up next to Dave Camp’s proposal, you could say these are two reasonable men working toward roughly similar goals, and you could put them in a room and two or three days later they’d emerge with a deal.”

Election-year pressures and the no-tax-increase stances of Republicans make an agreement hard to reach, Kleinbard said.

Thompson, the former senior director of global government relations at Merrill Lynch & Co., said Obama’s embrace of a tax code overhaul will prompt Republicans to advance more specific proposals of their own, perhaps leading to a rewrite next year.

“Every step forward, I think, leads you ultimately to a tax reform bill, not necessarily this year,” he said. “It’s a mistake to think that this is all going to fizzle and it’s not going to go any place.”

 

Bloomberg News

 

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