Companies quietly push for tax break on foreign profits in ‘fiscal cliff’ debate

Amid the tumult over looming tax hikes and spending cuts, a massive change to the corporate tax code is quietly gathering steam.

U.S. multinationals have spent years pushing for a change to the tax code that would eliminate taxes on business profits overseas, just as these firms are banking their futures on growth abroad.

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U.S. corporate income tax receipts since 1950.

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Now, with the debate over the country’s fiscal future in the spotlight, executives, lobbyists and some on Capitol Hill are latching onto the “fiscal cliff” as a potential springboard for their cause.

To the companies, no other tax issue matters more.

They say U.S. multinationals face a disadvantage against overseas competitors because, unlike practices in many other developed countries, the Internal Revenue Service collects taxes on foreign income when it is brought back into the United States. These companies argue that if the tax were eliminated, they would be more likely to bring their overseas earnings back to the United States. It is estimated that U.S. multinationals are holding $1.7 trillion in earnings abroad, largely to avoid being taxed at a 35 percent rate.

“At least it will be here and not circulating in other countries,” said Erskine Bowles, co-chair of a White House commission that was tasked with addressing the country’s debt and a supporter of eliminating taxes on foreign profits.

Some tax experts warn, however, that such a change could radically alter how companies behave and have broad implications for the economy. Without the right safeguards, they say, eliminating taxes on foreign profits and switching to what is known as a “territorial” system would blow a hole in tax revenue, give multinationals more leeway to exploit tax havens and drive jobs overseas.

“The territorial tax system they envision would gut the entire U.S. corporate tax code,” said Edward D. Kleinbard, a professor of tax policy at the University of Southern California. “It would lose gigantic sums of money every year.”

Support for a territorial system has appeared in a number of prominent places. It is among the recommendations from the National Commission on Fiscal Responsibility and Reform, co-chaired by Bowles and former senator Alan Simpson (R-Wyo.), and President Obama’s jobs council. It was part of GOP presidential nominee Mitt Romney’s economic platform. And it has been a perennial on the wish lists of business groups such as the Business Roundtable and the U.S. Chamber of Commerce, as well as many individual multinational companies whose chief executives met with leaders in Washington this past week.

So far, the territorial tax issue has received little public attention in the fiscal-cliff debate; the George W. Bush-era tax cuts that are scheduled to expire Dec. 31 do not affect corporate tax rates.

But policymakers are deliberating a potential compromise that could be attached to a bigger overhaul of the tax code next year.

Sen. Orrin G. Hatch (Utah), the ranking Republican on the Senate Finance Committee, wants to extend the Bush tax cuts for a year and “let Congress undertake comprehensive tax reform in 2013 with a shift to a territorial system as a part of that exercise,” according to Hatch spokeswoman Julia Lawless.