Reports Reject US Foreign Profits Tax Holiday

FINALLY.... someone in Washington is making sense!
MJ


by Mike Godfrey, Tax-News.com, Washington

07 October 2011

Two new studies, from both sides of the political spectrum, have denied that, if a tax break for United States companies repatriating profits from their overseas operations was to be re-instated, additional investment and jobs would be created in the American economy.

Currently, it is estimated that more than USD1 trillion in profits earned by American companies are kept overseas, due to the fact that, if repatriated to their US-resident parent companies, they would attract tax at the 35% US statutory corporate rate, less any taxes paid abroad.

Current proposals look at temporarily reinstating the provisions of the Homeland Investment Act of 2004, providing US multinational companies with the option to repatriate their overseas profits at a favourable tax rate – possibly 5.25%, or only 15% of the current US corporate rate.

Legislation could also include a disincentive designed to discourage those multinationals from repatriating earnings at the lower rate, while also reducing their workforce. A company could pay a fine for each job cut during the two years following the low-tax repatriation.

However, the Institute for Policy Studies (IPS) has pointed out that the 2004 “one-time” tax holiday failed to create the jobs that had been promised from the measure. One government study, it says, looking at the first two years after the repatriation windfall, found that twelve of the top recipients laid off more than 67,000 American workers.

Those firms, it adds, collectively brought back home more than USD100bn, nearly a third of the total amount repatriated by all firms that took advantage of the tax holiday, and saved an estimated USD32bn in taxes. In total, during the previous tax holiday, US companies repatriated USD312bn in profits - and avoided an estimated USD92bn in federal taxes.

The IPS concludes that the “wave of job destruction soon after the 2004 tax holiday went into effect, reported fairly widely at the time, does not tell the entire story. Dozens of major US corporations that benefited lavishly from the 2004 tax holiday, not just the early job destroyers, have downsized significantly in the years since.”

Furthermore, the Heritage Foundation has issued its own report, which largely agrees with the IPS and confirms that a tax holiday, similar to that in 2004, “would, like its predecessor, have a minuscule effect on domestic investment and thus have a minuscule effect on the US economy and job creation.”

According to the Heritage Foundation, a tax holiday “would have little or no effect on investment and job creation, the key to the whole issue, simply because the repatriating companies are not capital-constrained. Any investment (in the US) that they would deem worthwhile today can be and is being financed by current and accumulated earnings. For those rare instances in which outside financing is needed, interest rates remain at historic lows and few if any of these repatriating companies are constrained. Adding to their financing abilities will not increase the opportunities for investment.”

It considers that a more important reform would be to shift how the US taxes its businesses operating abroad, by a permanent partial exemption for future foreign-source earnings of all US businesses. In its opinion, “A forward-looking step toward territoriality - a system in which companies pay taxes at home only on profits earned at home - would have a far greater effect on US domestic investment and the US economy than a backward-looking tax holiday.”