Some People Don’t Care to Mince Words on Jon Huntsman’s Tax Reform Plan

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

The Obama administration is slowly starting to pick its battles; starting with taxes on corporations’ foreign earnings.

The administration has abandoned its proposal to eliminate U.S.-based multinationals’ ability to defer tax on income by shifting assets to foreign subsidiaries, according to a published report.

While details are sketchy, Bloomberg reported on Tuesday that the administration’s proposed budget for fiscal 2011 shows that it has abandoned its plan to eliminate the so-called “check the box” system under which U.S. companies can defer U.S. tax on income by shifting income-generating assets to foreign subsidiaries without recognizing gains on the transfer.

The proposal would have eliminated companies’ ability to avoid tax on such transfers and forced the repatriation of earnings shifted in this way.

According to Bloomberg, the administration backed down in the face of intense opposition from multinationals. Observers note that Congress has tried to squelch the efforts of the Internal Revenue Service to clamp down on U.S. companies getting foreign tax breaks at the same time as U.S. tax breaks, although many of those breaks are facilitated by the check the box system.

“Maybe the administration figured this was one it did not need to pick a fight on,” Jasper Cummings, a partner in the Raleigh, N.C., office of Alston & Bird and a former associate chief counsel of the IRS, said in an email to CFOZone Tuesday. “They have enough fights as it is.”

Still, Cummings noted that the administration still has “a pretty long list of other changes” in international taxation that it is pursuing. Chief among them is a plan to tighten the pricing rules for transfers of intangible assets.

As CFOZone reported last fall, one such proposal would crack down on asset transfers of employee compensation. In a paper released in May outlining its budget for the last fiscal year, the administration said it would “clarify” the treatment of transfers of intangible assets to include shifts of such expenses.

At present, many companies avoid paying tax on gains resulting from transfers of so-called “workforce in place” under rules that also allow goodwill and “going concern” to go untaxed. In early 2007, however, the IRS issued a staff directive and audit guidelines warning that it was “improper” for taxpayers to classify workforce in place as goodwill and going concern. And an IRS official in September indicated that transfers of workforce in place should include the value of products or services the employees create if much of the work is complete at the time of the transfer.

According to Bloomberg, the administration’s proposals to toughen the rules on transfer pricing would generate $15.5 billion in tax revenues for the coming year and along with other international tax changes produce $122.2 billion over a decade.