Lawmakers, White House Explore Tax Revamp for U.S. Firms Overseas

Discussions eye ambitious overhaul of how America taxes its multinational corporations

The tax talks are part of a bid to fund a highway bill. Senator Mitch McConnell, center, announced a preliminary deal Tuesday on a six-year bill. Photo: Michael Reynolds/European Pressphoto Agency

Top lawmakers and the White House are in the early stages of discussing an ambitious overhaul of how the U.S. taxes its multinational firms, according to officials involved in the effort.

The talks, part of an effort to find funding for a long-term highway bill, are preliminary and could yet fall apart or be overtaken by other approaches. But both Republicans and Democrats appear open to accommodating each other’s priorities, which could make the path to a deal smoother, according to the officials.

Topics being discussed include whether to eliminate the U.S. system of taxing companies on their world-wide income, what safeguards to adopt to prevent future abuses and whether to provide special tax treatment for intellectual property.

There is already one area of clear agreement. All sides acknowledge that an overhaul could raise revenues for highways by imposing a one-time tax on foreign corporate earnings sitting offshore.

“Everyone is largely in agreement on the building blocks of a deal,” said Rep. John Delaney (D., Md.), a longtime backer of the idea. Mr. Delaney said negotiators are thinking, “Let’s get the framework set, so then we can arm wrestle on the numbers.”

Overhauling the U.S. system for taxing multinational businesses has been a priority for Republicans, as well as some Democrats. Propelling this year’s discussions, which are being led by Rep. Paul Ryan (R., Wis.), is the realization that a tax overhaul could be coupled with a boost in highway funding, a priority of the Obama administration and Democrats.

The House recently passed a five-month extension of the highway program to buy time for talks. Senate leaders on Tuesday unveiled a competing proposal that would extend the highway program for six years. The measure provides only three years of funding, which could prove unacceptable to the House. It also stumbled in an initial Senate procedural vote on Tuesday. But the measure could provide lawmakers with more certainty.

Many lawmakers say combining the two issues is the best way to achieve both.

“I think there’s an avenue here…I think there’s growing bipartisan, bicameral support for the need to do” a tax overhaul at the same time as highway funding, said Rep. Pat Tiberi (R., Ohio), a senior Ways and Means Committee member.

Some experts say it is too difficult to fix the tax code piecemeal, given the complex intermingling of individual and corporate tax rules. But Mr. Ryan has made a practical calculation that the moment is ripe for what would still amount to a substantial revamp. He would seek a broader tax rewrite, including lower rates for individuals and corporations, after President Barack Obama leaves office.

At 35%, the U.S. corporate tax rate now is among the world’s highest, though many companies actually pay less. The U.S. also seeks to tax American firms on all their foreign earnings, while most other developed countries tax only profits earned within their borders.

American multinationals complain that these rules hurt their ability to compete with overseas rivals. The rules also have encouraged U.S. firms to park hundreds of billions in earnings offshore to avoid U.S. taxes, and to shift their headquarters overseas, often through a merger with a foreign firm.

Congressional aides say that the current talks are buoyed by each side’s openness to key priorities of the other side. For Republicans, a top goal is eliminating the U.S. system of world-wide taxation and replacing it with one that generally exempts overseas earnings, similar to that in use in most other countries.

Many Republicans also want to fashion some kind of special tax treatment for intellectual property, such as patents, to discourage U.S. companies locating more of their patents and other valuable intellectual property in other countries as a way to lower their tax bills.

Democrats as well as some Republicans, meanwhile, want to establish some kind of minimum tax on some portion of multinationals’ future foreign earnings, as well as other anti-abuse rules. Without that, they say American firms could exploit a new tax system, for example by shifting domestic earnings offshore where they wouldn’t be taxed by the U.S.

Administration officials and House Republicans have had extensive discussions showing potential for common ground on the big elements of a possible tax deal, according to people familiar with the matter.

“We wouldn’t be going down this path if we didn’t think there was openness” to Republican priorities, one House GOP aide said. By the same token, Republicans also “completely understand the need for credible anti-avoidance rules to limit profit shifting to havens and low-tax jurisdictions.”

The administration has signaled that it is at least open to consider some special tax treatment for intellectual-property income, but officials worry about the loss of tax revenue that would result.

Both sides have already agreed on the utility of a one-time tax on firms’ past foreign earnings currently held overseas. Such a tax would be part of a transition to a new system. It would also generate a big slug of cash for the federal government’s cash-strapped highway trust fund, perhaps $150 billion or more.

Experts say it is politically difficult to pull off a tax overhaul that would benefit mostly the biggest U.S. corporations. Domestic companies tend to oppose moves to overhaul the tax regime for multinationals because they would prefer to wait for a more comprehensive deal that would also lower the corporate tax rate.

In part to allay that concern, House leaders likely would permanently extend some temporary tax breaks that help small businesses. The Senate favors a temporary extension of those breaks.

Write to John D. McKinnon at
