Amid the tumult over looming tax hikes and spending cuts, a massive change to the corporate tax code is quietly gathering steam.

U.S. multinationals have spent years pushing for a change to the tax code that would eliminate taxes on business profits overseas, just as these firms are banking their futures on growth abroad.

Now, with the debate over the country’s fiscal future in the spotlight, executives, lobbyists and some on Capitol Hill are latching onto the “fiscal cliff” as a potential springboard for their cause.

To the companies, no other tax issue matters more.

They say U.S. multinationals face a disadvantage against overseas competitors because, unlike practices in many other developed countries, the Internal Revenue Service collects taxes on foreign income when it is brought back into the United States. These companies argue that if the tax were eliminated, they would be more likely to bring their overseas earnings back to the United States. It is estimated that U.S. multinationals are holding $1.7 trillion in earnings abroad, largely to avoid being taxed at a 35 percent rate....

 

Amid the tumult over looming tax hikes and spending cuts, a massive change to the corporate tax code is quietly gathering steam.

U.S. multinationals have spent years pushing for a change to the tax code that would eliminate taxes on business profits overseas, just as these firms are banking their futures on growth abroad....

House Republicans have already passed a budget that includes a transition to a territorial tax system, reflecting a framework first laid out by House Ways and Means Committee Chairman Dave Camp (R-Mich.).  Democrats are largely opposed to a territorial tax system, often contending that it would encourage firms to move more operations overseas, as Obama frequently argued on the campaign trail. The Obama administration has instead proposed a “global minimum tax” that would apply to income earned in any country.....

In the current system, a U.S. firm is supposed to pay a 35 percent tax on both domestic and foreign profits; taxes on foreign income can be deferred until companies use that money in the United States.

In reality, though, some multinational firms are able to pay a much lower rate by shifting their income to overseas tax havens and then deferring taxes on that money indefinitely. As a result, revenue from corporations as a percentage of the country’s gross domestic product is near its lowest point in the past 30 years.....

A switch to a pure territorial system, for instance, could cost jobs, said Kimberly Clausing, an economics professor at Reed College who calculates that as many as 800,000 jobs could be added to low-tax countries instead of the United States....

An upcoming fight over the territorial issue also has the potential to split the business community, between those whose operations are mainly domestic — and thus pay higher taxes — and the country’s biggest multinationals.

Tech and pharmaceutical companies in particular have an easier time reducing their taxes because they can pick and choose where they park profits associated with their intellectual property, a practice known as “income shifting.” Meanwhile, companies with brick-and-mortar operations mostly in the United States, like many retailers, are stuck with much higher tax rates.

Kleinbard, the USC tax professor, wondered why corporate tax reformers are not looking first at the higher rates paid by domestic firms that do not have overseas operations. “Of course we need a lower corporate tax,” he said. “If we’re going to start with lower tax rates, maybe we should start with lower taxes for domestic operating business so they can expand. Wouldn’t that be our first priority?”