By Kim Hart - 10/13/09 11:54 PM EDT
On Tuesday, about 40 companies met in Palo Alto, Calif., the heart of Silicon Valley, to discuss options to present to lawmakers and the White House when tax changes are considered again under broader corporate tax reform legislation as early as next year.
Microsoft, HP, Intel, Cisco, IBM and Oracle are among the tech giants that attended the meeting, which was organized by the Information Technology Industry Council (ITI), a trade group.
Shortly after the stimulus bill passed, the Obama administration started working on a plan that would raise revenue for the government to offset the increased spending. The plan would have changed a provision in U.S. tax law that allows American multinational companies to defer paying taxes on revenues earned overseas until the money is transferred back to the U.S.
As a result, many companies keep money abroad for an extended period to defer paying the taxes. The administration says that is depriving the government of much-needed tax revenue. Labor unions say it gives companies an incentive to push jobs overseas.
“It’s a tax code full of corporate loopholes that makes it perfectly legal for companies to avoid paying their fair share,” President Barack Obama said when he announced his proposals in May. “It’s a tax code that makes it all too easy for a number — a small number of individuals and companies to abuse overseas tax havens to avoid paying any taxes at all. And it’s a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York.”
Technology and pharmaceutical companies would take the biggest hits if the deferral provision disappears. The majority of technology firms’ revenue comes from overseas sales. Executives have argued that the tax deferral helps U.S. firms compete abroad, and the cost of business would rise so much without it that it could reduce domestic jobs and other investments.
They have also complained that the administration’s change would do away with the tax deferral provision without lowering the U.S. corporate tax rate, which, at 39 percent, is among the highest in the world, second only to Japan.
Tech firms are trying to come up with some budget-neutral options that will allow them to work with the White House to cut the corporate tax rate. The problem, however, is that lowering the rate by just one percentage point would cost more than $80 billion over 10 years.
Hellmann said businesses may have to start making some concessions.
“If the business community doesn’t take the lead and start showing lawmakers what we’re willing to give up to get the rate down, the lawmakers will come back and chip away at our tax incentives,” he said. “We run the risk of losing benefits without getting anything in return.”
Jonathan Hoganson, deputy executive director of the Tech CEO Council, a policy advocacy group, said the challenge is coming up with a solution tech companies can deal with while also giving the administration what it needs — more revenue.
“Is there a way to change the international tax code in conjunction with lower rates?” he said. “To get us on par with the rest of the world, the rate would have to be lowered so much that it just isn’t palatable … and it doesn’t solve the revenue problem.”
The Business Software Alliance (BSA) has also lobbied against the administration’s proposal and signed a letter, along with 300 other companies, sent to all members of Congress criticizing it.
Katherine McGuire, BSA vice president of government relations, said its “member companies understand that tax policy is an integral part of the overall innovation agenda and should not be treated separately.”
Two years ago, Rep. Charles Rangel (D-N.Y.), chairman of the House Ways and Means Committee, drafted a bill that would have lowered the international corporate tax rate to 30 percent. But to offset the cost, the bill would also have curtailed other corporate tax benefits and deductions. Technology firms vocally expressed their disapproval.
So far, no legislation to back up the administration’s plan has been introduced in Congress. Rep. Richard Neal (D-Mass.) and Sen. Max Baucus (D-Mont.), two lawmakers in the best positions to draft such legislation, have expressed their opposition to any changes in international tax laws before a larger tax overhaul is discussed.
“We’re not sure if there will be any legislation,” Hoganson said. “But it could be a constant fight” with the administration.