Policy and Government May 4, 2009, 1:25PM EST

Changing Corporate Tax Rules: A Tough Road Ahead

Big business is pushing back hard on Obama's plan to change rules governing deferral of taxes on overseas profits

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It appears that a level playing field depends on where your seats are. The Obama Administration on May 4 fleshed out its proposals for raising approximately $210 billion over 10 years by curbing what it says are corporate loopholes that allow companies investing overseas to gain an unfair advantage over companies that invest in the U.S., largely by deferring taxes on profits earned overseas indefinitely.

Arguing that a "level playing field" is needed, the Obama plan aims to change tax deferral rules for companies that invest overseas and make some other regulatory changes that would cut down on the use of overseas tax havens for businesses and individuals. According to Obama, a January 2009 report by the Government Accountability Office found 83 of the largest 100 U.S. corporations have overseas subsidiaries in tax havens.

Obama said that existing law makes it possible to "pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y."

The business community is already putting up a tough fight. Business Roundtable, an association of CEOs of the largest U.S. corporations, the U.S. Chamber of Commerce, and other business groups have launched a vigorous lobbying effort against the plan, arguing that the $210 billion hit to American businesses would distort the playing field and leave U.S. companies at a disadvantage in the corporate arena compared with other countries' tax regimes.

"My argument is, give me a level playing field, I can play. But if you tilt the field, you're going to throw people out of the game," James W. Owens, chairman and CEO of construction-equipment maker Caterpillar (CAT) and chair of Business Roundtable's International Engagement Initiative, said last month. "Let's don't throw our own multinational companies out of the game."

Vulnerable to Takeovers?

The companies argue that Obama's plan will leave U.S.-based companies vulnerable overseas because foreign rivals won't have to pay the 35% U.S. corporate tax rate—instead paying the tax rates, in effect, overseas, where they are generally considerably lower. Many executives claim it will leave them vulnerable to foreign takeovers and cause even more U.S.-headquartered companies to move abroad.

A key element of the tax proposal is to curtail sharply the ability for corporations to defer U.S. taxes on profits earned overseas until they are brought back to the U.S., while those companies can deduct costs related to the investments immediately. By contrast, U.S. companies must pay taxes on their profits at the same time as they take deductions for supporting investments. Obama also wants to close "loopholes" that allow companies to inflate or accelerate foreign tax credits. The Administration estimates it could raise $103.1 billion from 2011 to 2019 with the changes and proposes to use that revenue to make permanent a tax credit for investing in research and experimentation. Officials estimate that making the research tax credits permanent would cost taxpayers $74.5 billion over the next decade.

Additionally, the Administration says it would raise $95.2 billion over 10 years by cracking down on corporate "tax haven" strategies and the use of overseas accounts by wealthy U.S. citizens. It says it will hire nearly 800 new agents devoted to monitoring international compliance to support the changes.

Obama argues the changes are necessary to support job growth in the U.S. "Our tax code actually provides a competitive advantage to companies that invest and create jobs overseas compared to those that invest and create those same jobs in the U.S.," the White House said in a statement.