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WASHINGTON (Reuters) - U.S.-based global companies may get a boost in their effort to revamp corporate taxation if the White House and Republican lawmakers can negotiate a deal to avoid the year-end "fiscal cliff."
With President Barack Obama and Republican John Boehner narrowing their differences in the budget talks, Republicans hope a deal could open the door for steps next year to trim corporate tax rates and to move to a system where companies do not pay taxes on profits earned overseas, as they do now.
Republicans back a shift to this type of tax regime, known as "territorial" in tax parlance, which exempts profits earned outside the United States from U.S. corporate taxes.
The potential for moving to a territorial system is a turnaround from just a few months ago when Obama made his opposition to the tax change part of his successful re-election campaign.
Corporate America has griped for years that the United States has among the steepest corporate tax levies, and many countries have shifted to exempting offshore profits from domestic taxes.
Although most companies don't pay the 35 percent top U.S. corporate tax rate, Democrats and Republicans alike say high rates make U.S. companies uncompetitive.
They have sparred over taxing overseas profits, but in the current fiscal cliff talks, a push for a tax overhaul is among the sweeteners Obama is offering Republicans.
"It would not surprise me at all if the consolation prize for Republicans would be a commitment to move forward on comprehensive tax reform," said Jonathan Traub, a former staff director for Republicans on the tax-writing House Ways and Means Committee.
That committee is chaired by Republican Representative Dave Camp, who will be shepherding any tax reform.
"For Republicans, a key part of that is moving toward a territorial system," said Traub, now a managing principal at the accounting giant Deloitte.
Any year-end deal to avoid the $600 billion fiscal cliff of tax hikes and spending cuts likely will include guidelines for overhauling the tax code next year.
Obama's re-election has given the White House new leverage, so he is not likely to acquiesce at year's end to a territorial system but wait to use it as a chip in a broader tax code revamp, analysts said.
Camp and his Senate counterpart, Finance Committee chief Max Baucus, are working on a process to expedite tax reform. Baucus, a moderate to conservative Democrat, has not ruled out moving to a territorial tax system.
The two lawmakers, who have been meeting weekly for months on the project, are waiting for a final deal from the White House and Republican leadership.
Importantly, the language they are drafting will likely be neutral on moving to a territorial system, according to legislative aides.
That would be a win for Corporate America after Obama and Vice President Joe Biden both lambasted big business during the campaign for shipping jobs overseas and avoiding U.S. taxes.
Moving to a territorial tax system would "create 800,000 jobs," Obama quipped during a campaign debate with Republican rival Mitt Romney. "The problem is they won't be here. They'll be in places like China," where taxes are lower.
Critics of exempting foreign profits from U.S. taxes say such a policy will give U.S. companies incentive to move jobs to lower-tax countries.
Treasury Secretary Timothy Geithner agreed in concept last year to move to a territorial-type corporate system in talks over raising the government's borrowing authority, known as the debt ceiling, according to aides involved.
But those negotiations broke down and the White House shelved a separate proposal to overhaul corporate taxes.
Then came the presidential election campaign and heightened rhetoric about companies shipping jobs overseas. Biden even mentioned it during his Democratic national convention speech in September in an attack on Romney's tax plan.
Since Obama's November 6 re-election, the president has made an effort to mend ties with the business community.
At the same time, corporate leaders have been engaged in the public debate over taxes, most prominently in the Fix the Debt campaign, which includes the chief executives of General Electric, Honeywell and others.
Last week, White House officials held the latest in a series of meetings with the business community.
Dean Garfield, president of the Information Technology Industry Council, which represents big companies like Google Inc and Texas Instruments Inc, was among the business leaders at that meeting.
"There was an understanding of our perspective," Garfield said. He said he expected the issue of territoriality to be left an open question in the Camp-Baucus proposal, which he said would be a victory after it became an issue in the presidential campaign.
Critics of the territorial tax system have blasted groups like Fix the Debt for using their fiscal cliff lobbying to promote policies that would boost their own bottom lines.
An analysis by the consumer group Citizens for Tax Justice of 63 big companies that joined the Fix the Debt campaign found the companies would reap a $134 billion windfall with such a policy shift.
"There is a huge effort here on the part of the multinational corporations to get to zero tax on foreign earnings," liberal Democratic Senator Carl Levin of Michigan said last week. He said such an outcome would be grossly unfair.
Corporate taxes as a share of the U.S. economy has been waning for years, down from about 6 percent of gross domestic product in the 1950s, to less than 3 percent today, according to the Tax Policy Center.
Additional reporting by Patrick Temple-West; Editing by Howard Goller and Eric Beech