Jan. 12 (Bloomberg) -- Morgan Stanley, United Technologies Corp. and General Electric Co. are asking lawmakers to waive U.S. tax penalties on businesses that borrow from their offshore units, according to congressional aides and lobbyists.

The proposal would allow foreign subsidiaries to lend cash to their parent companies for up to two years without triggering a tax that would otherwise be due. It builds on regulations issued by the Treasury Department in October that were intended to help companies overcome the difficulty they have had issuing commercial paper since the onset of the financial crisis.

The proposal is being pushed by industrial and financial companies as an alternative to a broader, permanent tax break sought by drug and computer companies including Microsoft Corp., Oracle Corp., and Eli Lilly & Co. to bring home an estimated $655 billion earned offshore that has never been taxed by the U.S.

“There’s a big difference between forever and two years,” said Kenneth Klein, a lawyer at the Washington law firm Mayer Brown LLP.

Both proposals are being pitched for inclusion by Congress in President-elect Barack Obama’s fiscal stimulus plan as solutions to easing the credit crisis.

2004 Measure

A revival of the 2004 tax break, sponsored in the Senate by Nevada Republican John Ensign and California Democrat Barbara Boxer, was rejected last year by the Senate Finance Committee. It also has little support in the House, according to Washington Representative Jim McDermott, a senior Democrat on the tax- writing House Ways and Means Committee.

That plan would revive an expired 2004 benefit that allowed companies to repatriate money at a 5.25 percent tax rate instead of the 35 percent that would otherwise be owed.

Massachusetts Senator John Kerry, a Democrat, said during the Finance Committee debate on Ensign’s proposal last year that companies that pushed in 2004 for the tax break, which was billed as a job-creating measure, didn’t deliver on their promises to boost employment.

“Not only did the companies not create many jobs, they actually wound up laying people off,” Kerry said last year during the panel’s deliberations.

Instead, many companies found ways to use the law to increase dividends and buy back shares, circumventing Treasury regulations that barred such use of the funds.

The new proposal, being coordinated by the National Foreign Trade Council, a Washington-based business group, may gain more traction. Republican aides in the Senate said they are crafting a proposal based on the plan. Companies have raised the issue with Democratic staff, said Finance Committee spokeswoman Carol Guthrie.

Tax Deferral

U.S. tax law requires companies to pay taxes on their global income, though it allows deferral of that tax on some types of income earned overseas. Companies have deferred hundreds of billions of dollars using the exception. When the money is repatriated to the U.S., they must pay corporate taxes of 35 percent after a credit for foreign taxes paid.

Longstanding rules give companies a 30-day window to borrow without having the transaction considered a taxable repatriation. On Oct. 3, the Treasury Department issued rules that double that time period to 60 days and said companies can carry out such transactions only up to three times in 2008 or in 2009. The new proposal would expand the 60-day period to two years.

The ability to bring cash into the U.S. tax-free could give companies such as GE and United Technologies more flexibility in deciding how to use cash.

GE Capital

In December, GE said it would increase reserves at its finance unit, GE Capital Services Inc., to cover potential losses and lower leverage ratios to keep AAA debt ratings while also maintaining its shareholder dividend payout of $1.24 a share this year.

The 2009 dividend payout of about $13.4 billion should be covered by cash generation, an internal payment to the parent from GE Capital’s income, and dispositions totaling $16 billion after capital expenditures, the company said in a December presentation to investors. GE also stockpiled more cash last year amid the credit crunch, raising $15 billion through a $3 billion stake sale to Warren Buffett’s Berkshire Hathaway Inc. and a $12 billion stock sale in October.

As of 2007, the last full year for which numbers are available, GE had $62 billion in income “permanently re- invested” overseas as its annual revenue outside the U.S. grew to more than half of all sales, according to the company’s annual filing with the U.S. Securities and Exchange Commission. That figure is up from about $21 billion in 2003.

United Technologies

United Technologies, with $500 million of cumulative foreign earnings untaxed by the U.S. as of February 2008, didn’t take advantage of the 2004 law after evaluating its potential effects, according to filings with the Securities and Exchange Commission.

In Morgan Stanley’s case, a lobbyist said, the proposal would help the company meet regulatory capital requirements as needed. The company had about $5.8 billion in accumulated foreign earnings untaxed by the U.S. as of Nov. 30, 2007, after repatriating $4 billion in 2005 under the earlier tax law.

The United Technologies and Morgan Stanley lobbyists, speaking on the condition they not be named, said companies backing the alternative proposal believe it will be more palatable to lawmakers dissatisfied with the results of the first broad repatriation tax break in 2004.

‘A Few Conversations’

Peter Murphy, a spokesman for Hartford, Connecticut-based United Technologies said the company has “had a few conversations, but it’s too early to offer substantive comment.”

Peter O’Toole, a spokesman for Fairfield, Connecticut-based GE, declined to comment. Mark Lake, a spokesman for Morgan Stanley, didn’t return a call and an e-mail requesting comment. Other companies are involved with the effort, according to lobbyists who asked to remain anonymous and wouldn’t identify their clients.

Robert Willens, chief executive officer of New York-based accounting firm Robert Willens LLC who advises investors and companies on accounting and tax rules, said the new proposal may sidestep the questions that are undercutting the broader break sought by Senator Ensign, Microsoft, and Oracle.

“Maybe in this iteration, no limits will be placed on the use to which the funds are put and even stock buybacks and dividends will be permitted uses of the funds,” Willens said. “Given the state of the market, using the funds for stock buybacks might be seen as quite productive.”

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net.

Last Updated: January 12, 2009 17:50 EST