President Barack Obama's belief that the U.S. tax system pushesjobs overseas and Republican assertions that multinationalcompanies are disadvantaged will make compromise on a new corporatetax code difficult.

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

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

“That's oceans away, just miles and miles away,” said BruceThompson, a Washington tax lobbyist at Van Scoyoc Associates. “Justtwo different concepts.” His clients include a coalition ofcompanies that market and sell fuel with 85 percent ethanol.

U.S. companies now owe U.S. taxes on all their profits. They canclaim 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 todefer income. In addition, the new framework announced yesterdaymentions adding a minimum tax on global income, without providingdetails on how the tax would work.

“By imposing a minimum tax, you're creating winners and losersfrom the get-go,” said Dorothy Coleman, vice president of tax anddomestic economic policy at the National Association ofManufacturers 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 theylocate,” she said.

In contrast to the administration's plan, a territorial taxsystem like the one proposed by Republican Representative Dave Campwould exempt most foreign profits from U.S. taxation. The proposalby Camp, who heads the House Ways and Means Committee, includesoptions to prevent companies from shifting profits out of theU.S.

Multinational corporations have been urging Congress to adopt aterritorial system because they say it would let them compete ingrowing foreign markets without a residual home-country tax thatother companies don't face.

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

Unyielding Position

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

“If foreign earnings of U.S. multinational corporations are nottaxed at all, these firms would have even greater incentives tolocate operations abroad or use accounting mechanisms to shiftprofits out of the United States,” the administration said in itsdocument. “Furthermore, such a system could exacerbate thecontinuing race to the bottom in international tax rates.”

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

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

The president's plan also would raise revenue by lengtheningdepreciation schedules, limiting the deductibility of interest andchanging how large partnerships are taxed. None of those proposalsincluded details on how they might work or how much money each onewould contribute toward offsetting the rate reduction.

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

Camp favors a corporate tax rate target of 25 percent. TheMichigan Republican hasn't said what tax breaks he would eliminateto offset the cost of a rate reduction. The remaining Republicanpresidential contenders have proposed top corporate tax rates ofbetween 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 ofstaff 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 oninternational taxation.

Still, Kleinbard said, “If you line it up next to Dave Camp'sproposal, you could say these are two reasonable men working towardroughly similar goals, and you could put them in a room and two orthree days later they'd emerge with a deal.”

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

Thompson, the former senior director of global governmentrelations at Merrill Lynch & Co., said Obama's embrace of a taxcode overhaul will prompt Republicans to advance more specificproposals of their own, perhaps leading to a rewrite next year.

“Every step forward, I think, leads you ultimately to a taxreform bill, not necessarily this year,” he said. “It's a mistaketo think that this is all going to fizzle and it's not going to goany place.”

Bloomberg News

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