Business Fends Off Tax Hit

President Barack Obama addresses business leaders in March in Washington. The Obama administration has shelved a plan to raise more than $200 billion in new taxes on multinational companies.

The Obama administration has shelved a plan to raise more than $200 billion in new taxes on multinational companies following a blitz of complaints from businesses.

A contingent of Silicon Valley chief executives, for example, traveled to Washington in late September to speak out against the proposal to change how the federal government taxes overseas profits. They came away from meetings with key congressmen relieved.

Obama aides say the administration has set the idea aside for now, but may return to it as part of a broader tax overhaul sometime next year. The White House had billed the proposed change as an overdue fix to the tax code and potentially a key revenue-raiser.

“This has gone all of a sudden from red-hot to white-cold,” says Michael Klayko, chief executive of Brocade Communications Systems Inc., a large data-storage company. But he says he is concerned that if the proposed tax changes get entangled in the health-care overhaul, “it could go back to red-hot again.”

The story of the business community’s campaign against the tax changes and the Obama administration’s eventual retreat offers a window into the often uneasy relations between the White House and the corporate world. It suggests that an administration that was critical of business at the height of the financial crisis is becoming more accommodating. The White House, through a series of presidential lunches and other outreach, is trying to soothe tensions with multinational companies.

Lurking behind the tax debate was the administration’s need for new sources of revenue to fund its increased spending. Jason Furman, a White House economic adviser, made that point clear at the end of a session with a dozen or so lobbyists in March. Catherine Schultz, head of tax policy at the National Foreign Trade Council, who was at the meeting, says Mr. Furman basically told the group: “We need the money.”
[Business Fends Off Tax Hit]

From early on, there were reservations about the proposal among key lawmakers, and the White House indicated it was open to alternatives. Prominent members of the House Ways and Means Committee from both parties worried the provision would erode the competitiveness of U.S. companies abroad.

The tax dispute is rooted in an unusual provision in the U.S. tax code. Nearly all industrialized countries tax domestic companies only for revenues earned at home. The U.S. taxes companies on world-wide profits. But current U.S. law allows American multinationals to defer paying taxes on revenues earned abroad until companies repatriate them, usually in the form of cash dividends to the parent company.

Critics long have complained that the provision encourages companies to avoid U.S. taxes by expanding production on foreign soil. On the campaign trail last year, President Barack Obama promised repeatedly to “end tax breaks for companies that ship jobs overseas.”

U.S. businesses counter that the deferral provision allows them to better compete globally, which in turn allows them to expand their U.S. operations, too. If the deferral were eliminated, they contend, the financial damage to their businesses would require them to cut jobs in the U.S.

The issue has drawn little public attention, having been overshadowed by debates on health care, climate change and financial regulation. But it may have colored relations between the White House and the business community as much as any issue.

Companies ranging from Microsoft Corp. to General Electric Co. to International Business Machines Corp. put the topic at the top of their Washington agendas. Many CEOs and business lobbyists say the proposal — and the rhetoric used to push it — betrayed a tone-deafness on business issues among the president and his advisers. White House officials say the issue has often dominated discussions during meetings with CEOs.

The first sign that Mr. Obama planned to make good on his campaign promise came Feb. 26, when he released his proposed $3.6 trillion budget for fiscal 2010. The 134-page blueprint included revisions to the tax rules for U.S. companies operating overseas, which it said would raise $210 billion over 10 years.

The proposal sent tremors through the business community. Two weeks later, semiconductor chief executives and chairmen gathered in Washington. The group included Craig Barrett, then chairman of Intel Corp., and John Daane, chief executive of high-tech company Altera Corp. At a round-table discussion with reporters, the executives slammed the administration for seeking tax changes that would “punish” companies with offshore operations. They said they resented suggestions from the Obama campaign that their practices were somehow unpatriotic.

Dozens of other CEOs, from some of the country’s largest companies, raised similar complaints in interviews and opinion pieces. Brian Ferguson, then-chief executive of Eastman Chemical Co., told an industry trade publication that Mr. Obama’s tax plans posed “potentially devastating” challenges to those parts of the U.S. manufacturing sector that rely heavily on foreign sales.

When Mr. Obama addressed a gathering of CEOs at a Washington hotel on March 12, IBM Chief Executive Samuel Palmisano asked the president about the deferral issue. The provision, Mr. Palmisano said, “has been very, very important” in helping U.S. companies compete abroad. “So what we really are asking for,” he said, “is just an open dialogue.”

Mr. Obama said he would seek “the right balance,” but showed little inclination to budge. Most Americans found it “counterintuitive,” he said, that “businesses investing here are paying a higher tax rate than if they’re investing overseas.” It was important to have a tax code “that reflects those values,” he told the CEOs.

Within days, the Business Roundtable, the U.S. Chamber of Commerce and the National Association of Manufacturers began releasing studies intended to show that scrapping the deferral would hurt U.S. competitiveness, spurring companies to shift jobs overseas to save money or giving a leg up to foreign competitors. One study looked at the gradual elimination of the deferral allowance for U.S. shipping companies between 1975 and 1986, and the sector’s subsequent rapid contraction as foreign operators gained the upper hand. The groups also sent letters to leaders of the House and Senate, signed by nearly 200 companies, that criticized the proposal.

Hoping to clear the air, Treasury Secretary Timothy Geithner hosted a conference call March 25 with top executives from a dozen companies, including IBM, Citigroup Inc., GE, Google Inc. and Honeywell International Inc. Also on the call were Lawrence Summers, the White House economic adviser, and Valerie Jarrett, Mr. Obama’s top aide for corporate outreach. The Obama aides said they were open to discussing the provision, and insisted that it wouldn’t hit companies as hard as some CEOs thought, participants recall.

Tensions flared in May when Mr. Obama said in a speech he intended to push ahead with revamping the overseas tax rules. The president said the existing tax code “makes it perfectly legal for companies to avoid paying their fair share.” He blasted tax cheats who were “shirking” their responsibilities and vowed to clean up “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.”

The tone of his remarks surprised many chief executives, including some who had supported Mr. Obama during the election. Shellye Archambeau, chief executive of midsize Palo Alto-based software company MetricStream Inc., an Obama backer, says she found it “unfortunate” that “Obama himself…lumped taxpaying entities operating within the law with tax cheats.”

Honeywell Chief Executive David Cote, a Republican who supported Mr. Obama in the election, says he was taken aback by the president’s rhetoric on the tax issue. “You can’t love jobs and hate those who create them,” he says.

In a May meeting with a Silicon Valley delegation, Mr. Summers acknowledged that the government was desperate for new sources of revenue. He said the proposal would have far less impact than a total elimination of the deferral. Somehow, he said, the corporate sector had to help trim the rising deficit. “I need you to be patriots,” he told the group, say several participants.

In mid-May, while traveling in India, Microsoft Chief Executive Steven Ballmer suggested that curtailing the tax deferral could precipitate the very thing the government aimed to discourage: Companies would shift more jobs abroad to save money. “The government has to be thoughtful because there are unintended consequences,” he told a reporter from the India Express. “Will their actions create jobs in the U.S., or will they tend to drive even more jobs out of the U.S.?”

Concern was acute in the high-tech community, which had strongly supported Mr. Obama in the campaign but is heavily invested overseas. In early June, chief financial officers for high-tech giants such as Microsoft and Cisco Systems gathered in a conference room at semiconductor maker Applied Materials Inc. According to one participant, several CFOs said the deferred-tax proposal, if it became law, could drive them to relocate out of the country.

The CFOs directed their complaints at Laura Tyson, a Berkeley economist and outside adviser to the White House, who was there. “You need to convince people that you’re serious,” Ms. Tyson recalls telling them. “You need to provide evidence, and take this to the White House.”

Several prominent CEOs laid out their concerns in private White House sessions. Cisco’s John Chambers and Intel’s Paul Otellini each met with Ms. Jarrett, Mr. Obama’s corporate outreach aide. Mr. Chambers, she said, “wanted to just walk me through what kind of impact this would have on Cisco, which was quite large.”

Mr. Otellini says his message was straightforward: “Raising corporate taxes right now is probably not the best way to incentivize large corporations to add jobs in the United States.”

That message struck a chord in Congress. In late June, 39 centrist House Democrats, including seven members of the tax-writing Ways and Means Committee, wrote to House Speaker Nancy Pelosi, saying they opposed the president’s international-tax proposals as anticompetitive.

One month later, a coalition of business groups persuaded nearly 300 large companies, from Adobe Systems Inc. to Xerox Corp. to Yum! Brands Inc., to put their names to a letter to all members of Congress. The letter criticized the deferred-tax proposal and the administration’s rhetoric about it, particularly the White House’s lumping together of companies that use deferrals, which are legal, with companies accused of illegal tax practices. Deferral and related tax credits for companies competing in markets abroad “are integral parts of the U.S. tax system — not ‘tax loopholes,'” the letter read. “It is inaccurate and misleading to represent them as such.”

By last month, when lawmakers returned from their summer recess, the business community was increasingly confident that its message had gotten through. Democratic leaders in Congress had largely cooled to the concept. And White House officials, already embroiled in a heated health-care debate and a policy review of the Afghan war, were in no mood for a high-profile fight with business.

When Ms. Jarrett and Mr. Summers met in mid-September with a half-dozen top executives, including Boeing Co. Chairman James McNerney Jr., deferral again dominated the conversation. But the tone was cooperative, Ms Jarrett says. “We actually put the burden back on them — if they don’t like the deferral, to think of other revenue generators,” she says. “We have to do something about the deficit, so I am very curious to see what response we get back.”

One foe of the plan, Rep. Richard Neal, a key Democrat on the Ways and Means Committee, says, “We’ve made real headway.” He says he urged Mr. Obama personally at a White House meeting to shelve the idea until a larger tax-overhaul discussion next year. “I don’t think this will haunt the rest of the fall,” he says.

Businesses haven’t dropped their guard, however.

“Nobody is going to rest until the health-care bill is behind us,” says Ms. Schultz of the National Foreign Trade Council. “So long as the government is looking for revenue, this issue will be on the table.