Bloomberg Businessweek: Overseas Profits: When a 95% Tax Cut Doesn’t Cut It

June 08, 2012

Under current law, American companies pay a 35 percent U.S. tax on profits they earn abroad. They get credits for tax payments to foreign governments and don’t pay the U.S. anything until they bring the money home. House Ways and Means Committee Chairman Dave Camp (R-Mich.), the top Republican tax-writer in Congress, wants to give businesses an exemption on 95 percent of that foreign income. In exchange, Camp’s proposal would make it less enticing for companies to shift profits—particularly from intangible assets such as patents and trademarks—into tax havens such as Bermuda, as Google (GOOG), Cisco Systems (CSCO), and Forest Laboratories (FRX) do using strategies with nicknames like “double Irish” and “Dutch sandwich.”

Under one option Camp is weighing, companies would have to pay at least 10 percent in foreign taxes to qualify for the break. Another idea: If a company isn’t paying a foreign country at least 13.5 percent in taxes on intangible assets, the company would have to pay the U.S. enough to bring its total rate up to 15 percent, even if it doesn’t repatriate the money. In a third scenario, adapted from a White House proposal, a company’s “excess” (to be defined by Washington) profits on overseas intangible assets would get hit at a 25 percent rate.

Lobbying groups including the U.S. Chamber of Commerce, the National Association of Manufacturers, and the Business Roundtable are already pushing back. “We are a long way from developing a package that everyone can sign on to,” says Catherine Schultz, vice president for tax policy at the National Foreign Trade Council, whose board includes officials of Oracle (ORCL), Pfizer (PFE), Microsoft (MSFT), and PepsiCo (PEP). “You would not get a lot of the business community supporting this.”

That isn’t necessarily true. Companies that aren’t shielding much intellectual property from U.S. taxes by keeping it abroad say they’re happy Camp is poised to deliver legislation with a tax break that would bolster “American business competitiveness,” as Dave Cote, chairman and chief executive officer of Honeywell International (HON), puts it. Even the administration sees things to like in Camp’s proposal. Jason Furman, the deputy director of the White House’s National Economic Council, said last month that the Republican’s ideas represent “a very important and very hopeful area of consensus.”

That leaves the naysayers trapped. They don’t like what Camp’s proposed, yet they haven’t agreed on an alternative. Coming up with one is a “tortuous path,” says Pamela Olson, deputy tax leader at PricewaterhouseCoopers in Washington, who was assistant secretary for tax policy in the Treasury Department under George W. Bush. Camp says business can go along with his party’s “pro-growth reforms,” or succumb to the “massive tax hikes the president and Democrats are talking about.” Comparing the disgruntled companies to the spoiled rich kid from Charlie and the Chocolate Factory, the congressman says: “There are a few Veruca Salts who want it all and want it now.”

The bottom line: Companies are bemoaning the conditions Congress may put on a proposed tax exemption for 95 percent of their overseas profits.

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