Research & Commentary: Repatriation of Foreign Earnings
To avoid high U.S. corporate tax rates, U.S.-based companies operating internationally have kept their foreign earnings in subsidiaries overseas rather than bringing them back to the United States.
They do this because U.S. marginal tax rates are, by some measures, 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.
In his 2012 State of the Union Address, President Barack Obama proposed creating a “minimum tax” on foreign earnings of U.S. multinationals in order to prevent this. The tax is designed to ensure all foreign profits of U.S. multinationals are taxed once at a minimum rate, either by the U.S. or another country.
Critics of the president’s proposal say accusing U.S. companies of stowing money abroad to “avoid paying taxes” is disingenuous. According to the Tax Foundation, U.S. companies paid nearly $100 billion in income taxes to foreign governments on taxable income of $392 billion (2007 IRS data). Veronique de Rugy of the Mercatus Center points out the president fails to acknowledge that the punishing nature of the current tax system is responsible for this behavior. The U.S. corporate tax system makes U.S. companies less competitive in international markets, so keeping money overseas is often the most cost-effective move for U.S.-based businesses.
Members of Congress from both parties recently called for a “tax holiday” on repatriated earnings, similar to one implemented in 2004. 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. Tax collections almost certainly would rise, though they would decline once the holiday expired and rates returned to their current level. Tax holiday proponents say it could inject up to $1 trillion into the U.S. economy at no cost to taxpayers.
Such a tax holiday would be only a temporary first step in a needed overhaul of U.S. corporate tax policy. The long-term solution is to reduce the corporate tax rate permanently to a level competitive with other nations while switching to a territorial tax system that exempts most foreign profits from U.S. taxes.
The following articles examine the repatriation of foreign earnings from multiple perspectives.
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.
Half-Baked Corporate-Tax Reform
Writing in National Review, Veronique de Rugy of the Mercatus Center contends President Barack Obama’s corporate tax proposal does little to solve the real problem with the U.S. corporate tax system: its high, uncompetitive rates.
Tax Holiday Proponents Say It Will Bring Capital Back to the U.S.
Writing in The Heartlander digital magazine, Matthew Glans reports proponents of the proposed repatriation tax holiday argue the lower rate during the holiday would induce repatriation of earnings, boosting total tax collections.
Macroeconomic Effects of Reducing the Effective Tax Rate on Repatriated Foreign Subsidiary Earnings in a Credit- and Liquidity-Constrained Environment
This study commissioned by the American Council for Capital Formation found repatriation could increase liquidity in the United States, reduce the need for borrowing, increase cash flow, and stimulate capital spending and hiring.
Time for a Permanent Holiday on Foreign Earnings
The Tax Foundation examines the arguments for and against a tax holiday for repatriated foreign earnings.
Bringing it Home: A Study of the Incentives Surrounding the Repatriation of Foreign Earnings Under the American Jobs Creation Act of 2004
Jennifer L. Blouin and Linda K. Krull investigate the characteristics of firms that repatriated earnings under the American Jobs Creation Act of 2004 and examine how they used the repatriated funds. Researchers found firms repatriating under the act had freer cash flows than non-repatriating firms.
Would Another Repatriation Tax Holiday Create Jobs?
Heritage Foundation tax policy experts J. D. Foster and Curtis Dubay explain why a repatriation tax holiday would not be a step toward a sound policy of territoriality. Instead of a tax holiday, they suggest allowing some percentage, perhaps 10 percent or more, of future foreign earnings to be permanently exempt from U.S. taxes.
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
Robert J. Shapiro and Aparna Mathur analyze the 2004 tax holiday and estimate the expected economic impact of comparable temporary tax relief today. They find such a holiday today would provide substantial economic stimulus and significant additional liquidity for the U.S. financial system.
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 tax effects of deferred repatriation of foreign earnings and conclude the United States should bring its corporate tax rates and accounting rules into alignment with international standards.