Big companies take tax gripes to Geithner

WASHINGTON Fri Jan 14, 2011 1:06pm EST

Related Topics

WASHINGTON (Reuters) - Chief financial officers from multinational companies meet with Treasury Secretary Timothy Geithner on Friday to air gripes about the tax code under which they pay the steepest rate in the industrialized world.

Companies want the rate slashed, arguing that it handicaps them competitively against their foreign-based peers.

"The current tax code with its punitive corporate rates and complex maze of deductions and credits highly distorts economic decision-making," said Dean Garfield, president of the Information Technology Industry Council, whose members Cisco Systems and Microsoft Corp will attend the meeting.

Obama administration officials, for their part, say a corporate tax revamp must be "revenue neutral," so a rate cut will have to be offset by new revenue.

Administration officials point out that companies typically do not pay the full 35 percent rate, thanks to a myriad of deductions and credits that help them chip away at their rate.

Still, Geithner said earlier this week the high rate can influence incentives on where to invest.

"What we want to do is to make sure we are strengthening the relative incentives for investing in the U.S. versus shifting investment outside the United States," Geithner said on Thursday.

A big point of debate will revolve around what portion of profits is taxed.

WHERE INCOME IS EARNED

The United States is alone among its Group of Eight peers in collecting taxes on profits earned worldwide. Most other countries impose levies on domestically earned income only, under what is called a "territorial" system.

Companies get tax credits to avoid double taxation but executives say it does not fully offset the extra cost.

President Barack Obama's deficit commission recommended last month that the United States move to a territorial system. It also said many big corporate deductions and credits should be eliminated.

A move to a territorial system would primarily benefit big multinational companies -- leaving companies that derive more sales from the United States with fewer relative benefits. That could cause a rift in the business community.

In another wrinkle, a big chunk of businesses are not organized as traditional corporations at all. Taxes on these companies, many known as S-corps, flow through to individual shareholders who pay their individual income tax rate.

Thus leaving the top individual rate at 35 percent could cause another fissure among those executives who would not see a benefit in a corporate tax cut.

Representative Dave Camp, the Republican chairman of the House of Representatives' tax-writing Ways and Means committee, believes a tax code overhaul should address individual and corporate rates for this reason.

Camp will kick off the first of many expected hearings on Capitol Hill on the issue next week.

(Reporting by Kim Dixon; Editing by Dan Grebler)

FILED UNDER: