Policy Documents

Research & Commentary: Repatriation of Foreign Earnings Tax Holiday

Matthew Glans –
July 1, 2011

The globalization of business has made taxation of corporate earnings a complicated and confusing process. To avoid the high tax rates they would pay by bringing their foreign revenues back to the United States, American-based companies operating internationally have taken to keeping their foreign earnings in subsidiaries overseas. (U.S. statutory tax rates are the highest in the developed world.) Some financial experts say the high cost of repatriating foreign earnings has led to billions of dollars in capital becoming “frozen” in the financial systems of more tax-friendly countries.

Recently, members of Congress from both parties called for a “tax holiday” on repatriated earnings, similar to one that took place in 2004. Multinational corporations would be allowed to bring profits held overseas back to the United States and pay taxes on them at a rate possibly as low as 5.25 percent instead of the current 35 percent. That would induce repatriation of earnings, so tax collections would almost certainly rise. (The revenue would decline in future years, however, once the temporary holiday expired and rates were returned to their current level.)

Opponents claim the 2004 holiday produced few economic benefits and increased the incentive to shift income overseas. Supporters of the tax holiday say it could inject up to $1 trillion into the U.S. economy at no cost to taxpayers. The long-term solution would be to reduce the corporate tax rate permanently to a level competitive with other nations.

The following articles examine the repatriation tax holiday from multiple perspectives:

Using What We Have to Stimulate the Economy: The Benefits of Temporary Tax Relief for U.S. Corporations to Repatriate Profits Earned by Foreign Subsidiaries
This analysis of the 2004 tax holiday estimates the economic impact of comparable temporary tax relief today. The analysis shows such a holiday today would provide substantial economic stimulus and significant additional liquidity for the U.S. financial system.

Macroeconomic Effects of Reducing the Effective Tax Rate on Repatriated Foreign Subsidiary Earnings in a Credit- and Liquidity-Constrained Environment
This study examines the macroeconomic effects of a policy for repatriating U.S. foreign subsidiary earnings residing outside the country not presently used by U.S.-based businesses for spending, hiring, credit, or strengthening corporate balance sheets.

Time for a Permanent Holiday on Foreign Earnings
The Tax Foundation examines the current tax holiday debate for repatriated foreign earnings and the arguments for and against the proposal.

Bringing it Home: A Study of the Incentives Surrounding the Repatriation of Foreign Earnings Under the American Jobs Creation Act of 2004
This paper investigates the characteristics of firms that repatriated under the American Jobs Creation Act of 2004 and how they used the repatriated funds. Researchers found firms repatriating under the act had freer cash flows than non-repatriating firms.

Ten Reasons the U.S. Should Move to a Territorial System of Taxing Foreign Earnings
The Tax Foundation presents 10 reasons for the current U.S. international tax rules to be replaced with a territorial or exemption regime that frees most foreign profits from U.S. tax.

Barriers to Mobility: The Lockout Effect of U.S. Taxation of Worldwide Corporate Profits
Using data from a survey of tax executives, this study examines the corporate response to the one-time dividends-received deduction in the American Jobs Creation Act of 2004.

The Differential Influence of U.S. GAAP and IFRS on Corporations’ Decisions to Repatriate Earnings of Foreign Subsidiaries
Barry Jay Epstein and Lawrence G. Macy explain the differences in the required or permitted financial reporting of the tax effects of deferred repatriation of foreign earnings.