Perhaps the biggest surprise for corporate taxpayers in the President’s budget, released yesterday, is the absence of a proposal to scrap the entity classification rules — aka “check-the-box” rules — which many U.S.-based multinationals rely on to structure their offshore subsidiaries so as to minimize tax liabilities. The administration estimated last year that repealing check-the-box could bring in some $87 billion through 2020. But for now, at least, the idea seems dead in the dust.

So … is this a sign that the administration is easing up on its drive to reform the U.S. international tax system?

I asked Drew Lyon, principal in PricewaterhouseCoopers’ national tax services group, for his take on it. He was quick to point out that the general thrust of the budget on the international side is much the same as last year’s. It aims to raise revenue by just over $122 billion through 2010 — down, but not a whole lot, from last year’s $155 billion. Still, he sees some evidence that the administration is listening to business taxpayers’ concerns.

“One of the concerns that the business community had with [abolishing check-the-box] is that the direct effect would have been to increase tax payments that U.S. companies made to foreign governments, and not to the U.S. treasury,” Lyon notes. “So this may be an area where there’s some acknowledgment from the administration of those issues.”

The budget also scales back last year’s proposal to defer the deduction of expenses incurred in the U.S. and associated with earnings of foreign income. This year, the deferral would apply only to interest expense. “What they took out were expenses associated with the headquarters operations in the United States,” Lyon explains. “One of the arguments the business community had made was that those expenses are largely wages and salaries for employees of the headquarters operation. They would have been forced to disallow a portion of the deduction for those expenses, and businesses would have an incentive to move those functions overseas.”

Which, of course, is precisely the opposite of what the President is trying to achieve.

A couple of new provisions take on the vexed issue of transfers of intangibles, and one of them focuses specifically on such transactions in the context of transfer pricing. Lyon sees a danger here of what he calls a “heads-I-win-tails-you-lose policy” that would enable the IRS to selectively look back at such transactions when doing so might be favorable to the government, and to avoid a look-back when it might be favorable to the taxpayer.

Despite that risk, though, it does seem to me that the President is seeking to cut businesses some slack on the international side in this budget, at least compared to last year. And that’s probably just as well, given the administration’s now -all-consuming focus on jobs. ###