President Barack Obama's top financial wizards face an uphill climb on Capitol Hill in the coming weeks when they pitch the administration's vision for revamping the corporate Tax Code — particularly on a provision that would tax all foreign earnings.
A House GOP memo drafted late last week shows how Republican budget writers plan to poke holes in the president's blueprint. Topping the list: the proposal to tax overseas earnings by multinational firms at a "minimum rate" regardless of whether they bring that money back home.
The GOP memo questions why the administration opted for a "worldwide system of taxation that double-taxes American employers and puts our workers at a competitive disadvantage in the global economy," according to a copy obtained by POLITICO.
That clash of views on tax reform is expected to mark the opening bell for the first round of what's likely to be a long battle over how to tax the foreign earnings of mega-firms like Google, Oracle, Pfizer, Duke Energy and Hewlett-Packard. It's a showdown that is putting Republicans and lobbyists for the tech, energy and pharmaceutical industries squarely at odds with the White House.
The president's plan ignores calls by the GOP and the tech lobby for a repatriation tax holiday and a transition to a territorial system, which would allow companies to largely avoid having foreign income taxed.
The administration, and some tax experts, say the plan will clamp down on the biggest companies shifting income and investments outside the U.S. to tax havens. The blueprint has been applauded by some lawmakers and trade groups because it lowers the overall corporate tax rate, broadens the tax base and pumps up manufacturing and R&D.
The administration last week rolled out the framework, which Treasury Secretary Timothy Geithner described as the foundation to build consensus for a plan that can eventually pass muster with a bitterly divided Congress. He said the "process will take time. It will be politically contentious."
Already, Republicans and the tech lobby are taking aim at the blanket tax on overseas earnings, saying it will hurt U.S. companies trying to compete globally.
"It's going to be a topic of discussion not only among the ranking members and the chairs of the two [tax-writing] committees," said a senior GOP staffer, "but there's going to be some explaining to do when the administration comes up and tries to tell members why they are taking a turn that is so very different from our global competitors."
The president's willingness to weigh in on the issue has largely been praised. Most have been waiting for Obama to drop some form of corporate tax reform for years. But the tech industry, by and large, was blindsided by the White House's dismissal of a territorial system.
"We certainly didn't expect an embrace of a global system," said Dean Garfield, president and CEO of the Information Technology Industry Council. "On that, the administration is clearly out of step."
"We're not going to get behind a system that doesn't include a territorial competitive framework," he added.
Now that the plan has been rolled, the heavy lifting starts.
The administration and members of Congress will spend the better portion of this year — and possibly next year, too — largely focused on hashing out the details of how to tax the foreign earnings of U.S.-based multinationals, which have an estimated $1.5 trillion in profits parked overseas that is not currently taxed by the U.S.
It's unclear whether Republicans will budge on the issue of international taxation since it's at the top of the agenda for the powerful business community.
Consider this: Google says it has $21.2 billion in cash and assets, as of the end of last year, held by foreign subsidiaries, according to a regulatory filing. Apple puts its overseas assets at $64 billion for the end of 2011, and Microsoft reported $46 billion in profits held by foreign subsidiaries that would be subject to the U.S. 35 percent tax rate if they chose to repatriate.
Companies are loath to repatriate those profits because of the stiff tax penalty, so they're trying to sell Congress on a tax holiday. Obama has said he would consider repatriation only in the context of a tax reform package.
For now, that money is overseas, and while some is pumped back into U.S. stocks and securities, companies don't generally pay taxes to the U.S. on foreign earnings until they're repatriated. Obama's plan would do away with the deferral on foreign earnings and impose a minimum tax regardless of whether that money is ever brought home. It would provide a credit against earnings already taxed by a foreign jurisdiction.
"Today's global economy provides strong incentives for companies to shift investment and profits to countries with low tax rates. We want to reduce the opportunities the Tax Code now provides to shift income and investment outside the United States," Geithner told reporters last week.
Robert Pozen, a senior lecturer at Harvard Business School and a senior fellow at The Brookings Institution, defended the Obama approach, saying a territorial system would only exacerbate the current "race to the bottom," in which countries essentially bid for corporations by lowering tax rates.
"A pure territorial system will push a lot of U.S. corporate income to tax havens outside the U.S.," he said.
But Republicans already have this element of the president's plan in their cross hairs.
Sen. Orrin Hatch, the ranking Republican on the Senate Finance Committee, called Obama's plan "a set of bullet points designed more for the campaign trail." He also chided the president for retaining "the antiquated worldwide system of corporate taxation."
House Ways and Means Committee Chairman Dave Camp (R-Mich.), who has proposed a comprehensive tax reform plan that includes repatriation and a shift to a territorial system, told NPR on Friday that the president's plan is a "good step forward." But he said Obama "missed the boat by not addressing the fact that the U.S. is the only country in the world left with a worldwide system of taxation."
"I hope this is just the opening shot," Camp said. "I hope we can develop it into something that really will do a better job of making sure that American companies that do business overseas can bring those profits back and invest them back here for American workers."
Garfield said the administration has already showed some "willingness" to hear the tech industry's argument about moving to a territorial system. But moving forward, discussions about the tax plan will need to deeply involve the industry and that includes the chiefs at the top tech firms.
"They have reached out to a lot of CEOs in our community to get their feedback and walk them through the plan," Garfield said, adding that some CEOs of tech giants have already sounded off to the White House.
"I'm sure they're already getting an earful directly from those CEOs," he said.
There are still plenty of details to hash out, like a potential range for the minimum tax on foreign earnings.
Pozen, the tax expert from Harvard, said that figure is likely to be negotiated between 20 percent — the average of most U.S. trading partners — and 12.5 percent. The latter is Ireland's effective corporate tax rate and is considered the lowest of any non-tax haven jurisdiction. Tech sources have put a figure closer to 15 percent or 16 percent.
And the tech industry is still waiting to see how the administration tackles issues like transfer pricing and intellectual property, along with a number of other so-called offshore tax-haven loopholes — measures the administration say will boost efforts to prevent corporate tax lawyers from gaming the system.
At least one lawmaker, the Senate's foremost opponent of repatriation, has pledged to take up that fight as part of corporate tax reform.
"The president's proposal adds to the momentum that is building for tax reform that closes loopholes," Sen. Carl Levin (D-Mich.) told POLITICO in a statement. "I'm going to keep working to make sure that any tax reform closes egregious loopholes such as offshore tax dodging and the stock-option loophole."