We tried such repatriation of profits before (2004)—How well did it work? Here is a Wall Street Journal reporter’s view in 2011.
Report: Repatriation Tax Holiday a 'Failed' Policy
Oct. 10, 2011 9:41 p.m. ET
WASHINGTON -- The 15 companies that benefited the most from a 2004 tax break for the return of their overseas profits cut more than 20,000 net jobs and decreased the pace of their research spending, according to report from the Democratic staff of the Senate Permanent Subcommittee on Investigations released Monday night.
The report warned against repeating the tax break, calling the 2004 effort "a failed tax policy" that cost the U.S. Treasury $3.3 billion in estimated lost revenues over 10 years and led to U.S. companies directing more funds offshore. U.S.-based multinationals often defer bringing back profits earned abroad to avoid paying U.S. taxes on them.
The 15 companies that repatriated the most after the 2004 tax break on the return of overseas profits later cut a net 20,931 jobs between 2004 and 2007 and slightly decreased the pace of their spending on research and development, found the report surveying 19 companies' activity.
When Congress passed the repatriation tax holiday in 2004, the legislation specified that the funds should be earmarked for activities like hiring workers or conducting research and prohibited using the money for executive compensation or buying back stock. Companies that brought back profits earned abroad saw them taxed at roughly 5%, instead of the top 35% corporate tax rate.
"There is no evidence that the previous repatriation tax giveaway put Americans to work, and substantial evidence that it instead grew executive paychecks, propped up stock prices, and drew more money and jobs offshore," Sen. Carl Levin (D., Mich.), chairman of the subcommittee, said in a statement Monday night. "Those who want a new corporate tax break claim it will help rebuild our economy, but the facts are lined up against them."
The survey comes less than a week after Sens. John McCain (R., Ariz.) and Kay Hagan (D., N.C.) introduced a proposal for another repatriation tax holiday that would lower the tax rate on repatriated funds to 8.75%, with the opportunity to see that decrease to 5.25% if a company expanded its payroll. In the House, Rep. Kevin Brady (R., Texas) introduced a similar bill in May.
However, repeating the 2004 repatriation tax break has already come under criticism from skeptics, including the conservative think tank the Heritage Foundation, who have argued that companies aren't low on capital and the tax break won't nudge them into making any investments they wouldn't already make.
The five companies that benefitted the most from the 2004 tax break included Pfizer Inc., Merck & Co., Hewlett-Packard Co., Johnson & Johnson and International Business Machines Corp., repatriating $88 billion, or 28% of the total amount brought back to the U.S., according to the report. In total, 843 companies brought back $312 billion, the Internal Revenue Service has assessed.
The report noted that Pfizer had the single largest share of the repatriated profits, bringing home $35.5 billion in foreign earnings, while also cutting 11,748 U.S. jobs between 2004 and 2007. Similarly, IBM brought back $9.5 billion, but cut 12,830 jobs, the report stated, citing answers from the companies in response to its questions.
Meanwhile, the top 15 repatriating companies also accelerated their spending on stock buybacks and executive compensation after the tax break. The top five executives at those 15 companies saw their compensation rise 27% from 2004 to 2005 and then another 30% between 2005 to 2006.
The tax break gave a boost to a narrow slice of U.S. multinationals, with pharmaceutical and technology companies reaping more of the benefits and provided "no benefit to domestic firms that chose not to engage in offshore operations or investments," the report found.
Companies brought back funds held in areas that the Government Accountability Office has labeled tax havens, including Switzerland, the Bahamas, Bermuda, the Cayman Islands and Ireland. Of the 19 companies surveyed by the committee, seven repatriated between 90% and 100% of their funds from tax havens.
The 2004 repatriation tax holiday further motivated companies to keep even more of their earnings overseas, the report found. With the exception of Pfizer, the 10 companies that repatriated the most money after the 2004 tax break have stashed increasing funds offshore every year since the 2004 tax break, the survey noted.
For example, Coca-Cola Co. brought back "nearly all" of its qualified earnings from a unit in the Cayman Islands that had no Cayman employees and functioned to provide "legal insulation" for its U.S. assets, the company answered in the survey.
The "negative effects" of the tax break "create unfair tax advantages for a narrow sector of corporations with damaging economic impacts on the U.S. economy as a whole," the report concluded.
Supporters of another repatriation tax holiday Monday night said the report was one-sided and didn't reflect the stimulating effect an influx of funds could have on the struggling U.S. economy.
"Unfortunately, Senator Levin believes that Europe and Asia can do better things with the money than America," said Win America, a coalition backing the tax break, in a statement. "The real question is, should we allow American companies the freedom to deploy this money here or risk it being spent overseas?"
Mr. Levin and Sen. Kent Conrad (D., N.D.), chairman of the Senate Budget Committee also sent a letter to the Joint Select Committee on Deficit Reduction urging the 12-lawmaker panel not to support a repatriation tax break in its proposal to reduce the federal budget deficit.