Conventional wisdom dictates a candidate stumping for office will probably make good on about 20% of what he pledges on the campaign trail. Whether President Barack Obama will be able to deliver on all the “change” he promised during his ascent to the White House will be determined by a variety of factors including the success of economic recovery efforts, public opinion, the fickle will of Congress and so much more. Even still, there’s no question he is doing what he believes will shake up a calcified Washington by offering a flurry of controversial plans tackling a variety of immovable policy dilemmas like international tax reform, climate change, health care and more. Now the question remains: is it “change we can believe in”?

That question has taken on even greater importance with the recent defection of Pennsylvania Senator Arlen Specter from the Republican party, bringing Democrats one vote closer to the hotly sought after 60-vote “filibuster proof” majority in the Senate (achievable if Al Franken is ultimately seated as the Minnesota Senator). While few believe a Democratic supermajority in the Senate would be a total blank check, the Obama White House is clearly taking advantage of its position to advance a myriad of “sea change” proposals that, if enacted, could have a lasting impact for generations to come.

With this in mind, over the coming months, Capitol Comments will profile some of those “sea change” policy proposals. This month I will focus on the recent proposal to reform the corporate international tax structure. In the months ahead, look for articles on climate change, energy policy, healthcare reform and more. Of course, Capitol Comments will still cover nonwoven fabrics industry-specific policy matters when they arise but given the game-changing nature of the debate in Washington these days, all these issues simply cannot be overlooked.

International Tax Reform

Ending more than two months of speculation, on May 4, President Obama unveiled the first broad outlines of his plan to fix the “broken” U.S. international tax system. That sweeping effort looks to generate some $210 billion by going after overseas shelters and tax advantages that create offshore jobs. The savings, the president says, will be used to “reduce the deficit, cut taxes for American businesses that are playing by the rules and provide meaningful relief for hardworking families.” Many U.S. companies, however, fear the proposals will strike a crippling blow to an already devastated economy.

The first part of the plan goes after items like “deferral” and the foreign tax credit, which Obama says, reward companies for shipping jobs overseas. “Deferral” allows companies to delay paying taxes on earnings of their foreign subsidiaries until those earnings are paid to the U.S. parent (repatriated). U.S. business groups say it is necessary to help companies, which already face one of the highest corporate tax rates at 35%, to compete. To address this contradiction, the Administration says it will limit deferral by preventing companies from claiming deductions for domestic expenses related to foreign earnings until they return their profits to the U.S., with an exception for research and experimentation expenses.

According to the White House, these deferral reforms could take effect in 2011, raising $60.1 billion from 2011 to 2019.

Obama also takes aim at foreign tax credit “loopholes.” Under the current system, U.S. businesses may legitimately claim a credit for foreign taxes paid on overseas profits to avoid double taxation. However, the rules enable firms to claim credits for taxes paid on foreign income that is not subject to U.S. tax. That means some have paid less on their U.S. income than if it were strictly from the U.S. The administration proposes two changes. Under the first, the government would determine the credit based on the amount of total foreign tax paid. In addition, the credit would no longer be allowed for income not subject to U.S. taxes. That is projected to raise $43 billion from 2011 to 2019.

There is a sweetener, though, for U.S. business interests. It would redirect some of the money created by the deferral and foreign tax credit changes by making the research and development tax credit permanent. The White House says it will save U.S. businesses $74.5 billion over 10 years and “jump start job creation, foster innovation and enhance America’s competitiveness.”

The second part of Obama’s plan would crack down on international tax havens. It would focus onso-called “check-the-box” rules that emerged during the Clinton Administration.Those rules allow companies to make their foreign subsidiaries “disappear”for tax purposes. They permit them to shift income offshore shelters and avoid paying taxes. The Obama administration says it would reform these rules by making foreign subsidiaries operate asseparate U.S. corporations tax purposes, raising $86.5 billion.

The administration is also planning to more ardently enforce tax haven abuse by wealthy individuals, and to crack down on foreign financial insititutions that facilitate evasion. This would lead to teh hiring of nearly 800 new Internal Revenue Service employees for this.

Not surprisingly, the proposed changes have drawn sharp criticism from U.S. business interests, who point out that domestic multinational companies employ nearly 22 million workers in the U.S. and support some 30 million others. They argue that the changes to deferral and foreign tax credits would devastate these firms when they are already working overtime to remain competitive. In addition to the aforementioned high corporate tax rate, they point out that most other countries that tax worldwide earnings like the U.S. permit some form of deferral, and that eliminating these provisions would put them at serious competitive disadvantage.

In the meantime, reaction on Capitol Hill has been mixed. While support appears to be strong among House Democrats, in part because of the proposal’s revenue-raising potential, some key Senate Democrats have been more circumspect. While acknowledging his backing for corporate international tax reform overall, Senate Finance Committee Chairman Max Baucus (D-MT) has said he wants to analyze the Administration’s proposals to make sure “the policies are fair and support the global competitiveness of U.S. businesses.”

The National Association of Manufacturers, the U.S. Chamber of Commerce, the National Foreign Trade Council and the Business Roundtable have come together with some 200 U.S.-based multinational firms and trade associations—including INDA—to form the Promote America’s Competitive Edge (PACE) coalition. INDA is routinely participating in coalition activities but if your company is concerned about the Administration’s recent proposals, PACE recently launched a new website, www.pace4jobs.org. It serves as a one-stop source of information on deferral and related issues that includes issue briefs, a deferral “primer,” fact sheets, case studies, a glossary of terms, up-to-date news and information, useful links and other background information.

In closing, it is plain to see that the Administration’s plans could have a tremendous impact on our businesses, so we all need to pay close attention as these proposals go through the Washington grinder. If you’re interested in learning how you can get more involved, please do not hesitate to contact me directly at 703-521-0545 or [email protected].