By Jia Lynn Yang
Washington Post Staff Writer
Saturday, May 29, 2010; A15
A jobs bill passed by the House on Friday has reignited one of the biggest ongoing fights between business and Washington: how to tax the foreign profit of U.S. companies.
For more than a year, the issue has been a major sticking point between industry and President Obama, who has frequently vowed to fight the offshoring of jobs by raising taxes on U.S. companies that operate overseas. The bill, slated to reach the Senate floor in June, would extract $14 billion from multinationals to cover the cost of extending unemployment benefits and renewing a series of expired tax credits.
Now an alliance of big companies, including Microsoft, IBM and General Electric, is ready to take its case to the Senate, arguing that the bill will make U.S. businesses less competitive abroad, where they already face higher taxes than companies in other countries. Another concern is that any decline in profit at U.S. multinationals ultimately hurts their ability to hire American workers.
Last year, under a separate proposal in the 2010 budget, the White House proposed making broader changes to the tax system that would cost multinationals $210 billion. But after intense lobbying from executives, particularly in the tech industry, the administration cut that figure roughly in half.
Even though the current bill makes only modest changes by comparison, companies are worried about what lies ahead.
"We're on the tax-increase treadmill," said Ralph Hellmann, senior vice president of the Information Technology Industry Council, which represents tech industry interests. "Every time they need to offset six or seven billion dollars, we get permanent six or seven billion-dollar tax increases."
Hellmann added that companies were under the impression from Sen. Max Baucus (D-Mont.) and Rep. Charles B. Rangel (D-N.Y.) that any changes to the corporate tax code would only be made as part of a comprehensive tax reform bill -- not doled out piecemeal to cover the cost of other programs.
Tech firms are particularly concerned about higher foreign taxes because of how much they rely on international sales. Last year, two-thirds of sales at IBM and Hewlett-Packard were abroad. At Intel, that figure was 82 percent.
In a letter to lawmakers this week, IBM's vice president of governmental programs, Christopher Padilla, said the company would rather lose a tax credit for research and development than face higher taxes on foreign profit. "Although our company has been a longtime supporter of the R&D tax credit . . . the pending legislation would impose significant new tax increases that will completely overwhelm any positive economic effect of the R&D tax credit, harming the U.S. economy just as recovery has begun," Padilla wrote.
The higher tax on overseas earnings would also affect pharmaceutical companies. Like tech firms, pharmaceuticals, which depend heavily on intellectual property, tend to concentrate high-cost operations in low-tax countries.
The United States is one of a few countries that tax companies for income earned overseas. The U.S. tax code is also unusual because companies can put off paying domestic taxes until they bring their foreign earnings back home -- if they ever do. It's estimated that $1 trillion of earnings from U.S. multinationals is sitting abroad and has never been taxed domestically.
Because of the potential for a company to be taxed twice -- once abroad and again in the United States -- the tax code includes credits for any taxes paid to foreign governments. The story gets more complicated, however, because companies can mix and match these credits and detach them from the income with which they're associated.
For example, Ireland charges a zero tax rate on royalty income. A U.S. company with business in Ireland can bring back its royalty income and look elsewhere in its international operations for taxes it paid in other countries on other income. The company can then use these foreign tax credits against the royalty income and avoid paying the full 35 percent U.S. corporate tax rate on the royalty money.
The House bill would make it harder for companies to do this kind of tax arbitrage.
"All this bill is trying to do is enforce the law as it was intended to be enforced," said George Yin, a law and tax professor at the University of Virginia School of Law.