Changing Corporate Tax Rules: A Tough Road Ahead

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"President Obama's plan today to increase taxes on American corporations is the wrong idea at the wrong time for the wrong reasons," said John J. Castellani, president of Business Roundtable, in a statement issued minutes after the President spoke. "This plan will reduce the ability of U.S. companies to compete in foreign markets, which will not only reduce jobs but will also cripple economic growth here in the United States. It couldn't come at a worse time."

The U.S. Chamber of Commerce was also quick to respond. "Deferral has been mischaracterized as a 'tax break' but is actually a vital mechanism providing relief for American businesses from double taxation," argues Chief Economist Marty Regalia. "The United States is the only major industrialized country which double taxes the overseas earnings of our companies. Since other countries don't subject their companies to double taxation, U.S. companies need deferral to stay competitive in the global marketplace."

Daniel Clifton, a Washington-based policy analyst with Strategas Research Partners, said in a May 4 research note that technology and pharmaceutical firms would be most affected by the proposals. "Make no mistake, this proposal will increase the cost of a U.S. company in the global marketplace and holds significant implications," Clifton writes.

For some more than others. The company in the Standard & Poor's 500-stock index that gets the most revenue from overseas, according to Strategas, is semiconductor maker Nvidia (NVDA), with 91.7%. As a result, the company, which is headquartered in Santa Clara, Calif., pays little in taxes—an average of 2.2% of earnings per year for the past four years, according to a recent BusinessWeek study of the cash taxes companies pay. The company gets tax credits for the costly research it does in the U.S. but then sells most of its products in 17 countries around the globe. Nvidia rival Broadcom (BRCM), based in Irvine, Calif., also does much of its R&D stateside, but manufactures and sells overseas for the most part—often in low-tax jurisdictions. It operated under a tax holiday in Singapore that saved it $284 million in taxes in 2008, and with R&D tax credits the company was able to keep the entire $1.5 billion dividend it brought to the U.S. from overseas earnings in 2008.

Corporate Tax Debate

Owens and other corporate representatives are pushing for any change in deferral to take place within the context of a debate over the corporate tax structure as a whole. They argue that the 35% overall rate—the second-highest statutory rate among developed countries—should be lowered in exchange for trimming back some of the tax breaks that mean few companies pay anywhere near that effective rate.

That may not be as difficult an argument to win as it might appear, given the harsh tone the President took in chastising companies that, he argued, are taking advantage of loopholes to "dodge their responsibilities." Although the Administration would like to move forward quickly on its proposals, Congress may not agree. Anne Mathias, director of research at Concept Capital's Washington Research Group, says many in Congress, and most important, Representative Charles Rangel (D-N.Y.), the powerful head of the tax-writing Ways & Means Committee, don't want to take up the President's proposal in isolation; instead, Rangel wants to address deferral as part of a broader package of corporate tax changes he has been working on for two years.

Mathias says Congress is unlikely to begin moving forward on the deferral issue until late this year, at the earliest. If the economy is still weak, any real decisions could even be delayed until after the 2010 congressional elections. That should give U.S. multinationals and their representatives plenty of time to try to reframe the debate.

BusinessWeek senior writer Nanette Byrnes contributed to this story. Mintz is news editor for BusinessWeek.com in New York. Sasseen is Washington bureau chief for BusinessWeek.

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