Nearly half of senior executives favor changing how corporate income earned outside the United States is taxed, according to a new survey, although many don’t expect much progress on the issue of corporate tax reform before the 2012 elections.

The survey by KPMG’s Tax Governance Institute of 1,200 business leaders followed the release of a recent congressional proposal that would overhaul international tax laws by creating a territorial system (see Congressional Republicans Propose International Tax Reforms). The survey found that 49 percent of the respondents said they favor a territorial system of international taxation, under which almost all foreign income of U.S. multinational companies would be taxed where it is earned and could be brought back to the United States without incurring additional tax.

“The survey results reiterate what many multinational companies have been advocating for some time—a move toward a system of international taxation that matches the approach of most other countries and ends the residual U.S. taxation of active business income earned outside the United States,” said KPMG tax principal Hank Gutman, director of TGI and former chief of staff of the U.S. Congressional Joint Committee on Taxation.

The survey respondents expressed overall skepticism about quick action on the issue of taxing business income earned outside the United States and on corporate tax reform in general. 

According to the survey, most respondents (61 percent) predicted it would take two years before the United States would adopt a territorial system, and only 27 percent believe there would be corporate tax reform in the next 12 months.

In addition to the 49 percent who said they favor a territorial system, 16 percent of the respondents preferred the U.S.’s current worldwide tax system, which requires U.S. multinationals to pay taxes on profits on active business income earned outside the country, while receiving tax credits for payments to other governments and deferring residual U.S. tax until they bring the money home. Eight percent said they favored a worldwide system that made corporate overseas profits immediately taxable, and 27 percent said they weren’t sure what system they preferred.

The territorial taxation proposal, released Oct. 26 as part of a comprehensive discussion draft by House Ways and Means Committee Chairman David Camp, R-Mich., assumes the top corporate rate will be lowered to 25 percent from its rate of current 35 percent and would be revenue neutral. The proposal is part of a broad plan that Camp is seeking to rewrite individual and corporate U.S. tax laws.

“Chairman Camp’s proposal is a bold and comprehensive discussion draft that could drastically alter the playing field,” Gutman said. “Companies need to pay close attention to this important issue and how the end result could affect them.” 

While nearly half the respondents to the survey favor a territorial system, only 39 percent said they favor exempting overseas corporate income permanently from U.S. taxation. Thirty-two percent opposed such an exemption and 29 percent were unsure.

“This finding highlights the concerns of multinationals versus domestic companies on the topic and shows how difficult it will be to arrive at an acceptable solution to this and other issues related to business tax reform,” said Gutman.

Forty-eight percent of the survey respondents believe a change in the territorial taxation system would open the door for a cut in the corporate tax rate. Only 15 percent of those surveyed said they thought the United States would adopt a territorial system without broad corporate tax reform. A vast majority (64 percent), though, felt broad corporate tax reform was necessary for such a move.

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