Corporations couldn’t wait to "check-the-box" on huge tax break

In Congress, tax committee members lined up alongside business leaders, with Rep. Dave Camp of Michigan, the top Republican on the House Ways and Means Committee and now its chairman, saying the proposals would put U.S. corporations on the auction block.

“Ironically, what the president proposes will make it more likely that American companies will be bought by their foreign competitors,” Camp asserted.

The Obama administration quickly retreated.

“They knew the business community was going to push back. What they were really surprised by was how vehemently the business community reacted to it,” said Catherine Schultz, vice president of tax policy for the National Foreign Trade Council.

In early 2010, Treasury Secretary Timothy Geithner informed the Senate’s tax-writing committee that the administration was dropping its attempt to broadly reform check-the-box. Instead, Treasury would focus on combating misuse of the rule as part of other tax-avoidance techniques, including inappropriate foreign tax credits, he said.

“Our goal in these proposals is to limit the role taxes play in business investment decisions by reducing implicit incentives to move jobs and investment overseas,” Geithner testified.

While announcing his deficit-cutting plan last week, Obama faulted the corporate tax system as “riddled with special-interest loopholes” and a high rate that hurts “our competitiveness in the world economy.”

He proposed more than a dozen business-tax reforms, including ending breaks for fossil-fuel development and tightening accounting measures involving foreign income. Although Obama did not mention check-the-box, its business supporters have defended it on Capitol Hill.

On the same day that Obama addressed Congress, an executive from Cargill, the world’s largest trader of agricultural commodities, told the Senate Finance Committee about possible reforms to the tax code – but not check-the-box.

Scott M. Naatjes, Cargill’s vice president and general tax counsel, said repealing check-the-box would cause U.S. companies to pay more taxes abroad and make them less competitive. Sixty percent of Cargill’s operations are outside the United States.

The Senate panel also heard testimony from a law professor suggesting that American companies are not so disadvantaged.

Reuven Avi-Yonah, head of the international tax program at the University of Michigan Law School, testified that large European countries have stricter rules when it comes to taxing profits made outside their country. Japan and Germany recently have made it harder for corporations there to avoid taxes or shift income to lower-taxed jurisdictions, he said.

In an earlier interview, Avi-Yonah said it would take a comprehensive approach by Washington to curb the ability of corporations to find new loopholes.

“It’s a problem to only close specific loopholes instead of addressing the issue in a general way,” he said. “Companies simply find new ways to replace the approaches shut down by authorities.”

Meanwhile, check-the-box deals “are going like crazy,” according to one prominent tax lawyer who helps structure such transactions. He declined to be named for fear of jeopardizing his job but added: “I can design these a thousand different ways.”

This article originally appeared in ProPublica, which co-published the piece with the Financial Times.