Debate Over Corporate Tax Reform Rages On

Lines are being drawn and sides are being taken as Congress attempts to overhaul the corporate tax code. Corporate giants such as General Electric Co. and Microsoft Corp. are battling it out in hopes of influencing the debate. This decision will impact international companies significantly due to the drastic changes that will be made to foreign income in an effort to prevent corporations from shifting profits abroad to places that impose little or no tax.

“Whether tax reform takes place in 2013 or 2014, it’s inevitable it will take place,” said William Hoagland, a senior vice president at the Bipartisan Policy Center and former Republican staff director on the Senate Budget Committee. “I think people are putting markers down as fast as they can.”

This inevitability became clearer on Friday and Saturday as global finance ministers from the Group of 20 largest economies endorsed a major overhaul of international taxation designed to reduce corporate tax avoidance. Companies like Amgen Inc. and Microsoft that benefit from royalty income from intellectual property are pushing to preserve their ability to park this income in low-tax places as is common practice among large corporations to dramatically reduce their tax bills. Both companies are working, tirelessly, to oppose a draft proposal from Mr. Camp that would impose a 15% tax on income from patents, trademarks or other U.S.-owned “intangibles”, regardless of location.

Companies like General Electric are willing to accept these sorts of income taxes as long as their tax rate is lowered. The United States has the highest corporate tax rate (35%) of any developed nation. However, companies like General Electric have much less on the line due to a drastic difference in income generated by intellectual property. Microsoft, General Electric, and a dozen other companies, began these talks as one movement, but Microsoft backed out when it determined its interests weren’t being represented. This coalition, known as the Alliance for Competitive Taxation is willing to settle with as many tax breaks as necessary in exchange for a corporate tax rate of 25%.

However, Microsoft isn’t one to take something like this sitting down. Remembering that there is strength in numbers, Microsoft and Amgen joined Tax Innovation Equality, whose goals include making sure tax changes don’t “discriminate” against the way companies structure their income from intangibles. Overhauling the international tax code is not something to brush off, and neither party is close to an agreement. Some corporations are beginning to wonder, if they haven’t been all along, whether or not congress should be able to tax their incomes abroad.