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Tags: Senate | Tax | Holiday | Failed

Senate Report Calls Repatriation Tax Holiday ‘Failed’ Policy

Tuesday, 11 October 2011 07:12 AM

A report from U.S. Senator Carl Levin calls a tax holiday for repatriated offshore profits a failed policy that shouldn’t be repeated.

The report, scheduled to be released tomorrow, was obtained today by Bloomberg News from two people who provided the information on the condition they not be identified. It is based on publicly available data and surveys of 20 companies that show they bought back stock and raised executive compensation after a 2004 tax holiday rather than increase research spending and add jobs.

Levin’s office didn’t respond late today to phone and e- mail requests to confirm the report’s authenticity.

“The U.S. Treasury lost out on billions of dollars in tax revenues with no evidence of the benefits that it expected to receive in exchange for the loss,” the report says.

Levin, a Michigan Democrat who heads the Senate’s Permanent Subcommittee on Investigations, is releasing the report as other lawmakers try to build support for a repeat of the 2004 tax holiday. Last week, Democratic Senator Kay Hagan of North Carolina and Republican John McCain of Arizona proposed letting companies return offshore profits at a top tax rate of 8.75 percent, compared with the 35 percent statutory rate.

Lobbying Efforts

Companies such as Pfizer Inc., Google Inc. and Cisco Systems Inc. are lobbying Congress for a tax holiday, contending that could unlock more than $1 trillion in profits that are held offshore. They say bringing home the profits at a low rate would spur hiring.

Under U.S. tax law, multinational companies owe federal income taxes on their worldwide profits. They receive tax credits for foreign taxes paid and can defer U.S. taxation until they bring the profits home.

Levin’s report focuses on what happened after Congress enacted a repatriation tax holiday in 2004 and offered companies a 5.25 percent tax rate. According to the Internal Revenue Service, companies brought back $312 billion that qualified for the preferential rate.

The report found that the 15 corporations that repatriated the most money cut an aggregate of 20,931 jobs in the U.S. from 2004 to 2007, including job losses at Pfizer, International Business Machines Corp. and DuPont Co. Some of those companies aren’t part of the coalition formed to lobby for a new tax holiday.

According to the report, only two companies -- Oracle Corp. and Microsoft Corp. -- said the money they brought back to the U.S. contributed to job growth.

‘Hiring Aggressively’

In a statement today, Oracle Senior Vice President Ken Glueck said the company has more than doubled its workforce since 2004 and is “hiring aggressively” now.

“The only news in Senator Levin’s results-oriented ‘study’ is that he still opposes repatriation,” said Glueck, whose company is part of the pro-repatriation coalition. “With unemployment over 9 percent and more than $1 trillion waiting to be put to work in the United States one would have thought he would revisit his long-standing opposition.”

The 2004 experience has prompted some lawmakers, including Hagan, to attempt to tie lower rates for repatriated profits to job creation. Under her bill, companies that add jobs would be able to get a tax rate as low as 5.25 percent.

Others, including Democratic Senator Charles Schumer of New York, have expressed openness to a repatriation holiday if any proceeds were dedicated to infrastructure.

Obama Administration’s Stance

The Obama administration opposes a stand-alone repatriation holiday. The top Republican tax writer in the House, Representative Dave Camp of Michigan, wants to consider the issue as part of a broader overhaul of the tax code.

Along with other studies of the 2004 tax holiday, Levin’s report finds that companies that repatriated the most money accelerated stock buybacks. According to the report, 12 of the top 15 repatriating companies increased stock repurchases from 2004 through 2007.

Congress attempted to prohibit the use of repatriated money for stock buybacks and executive compensation and required companies to file a domestic investment plan. Levin’s document, which is being published as a “majority staff report,” says that the ability to move money within a company made it easy for companies to move their assets around as they saw fit.

“Because corporations had no legal obligation to substantiate how they used repatriated funds, no documentary evidence was obtained establishing that corporations misapplied repatriated funds to prohibited uses in violation of the law,” the report says.

The Levin study also echoes others that found companies have added to their overseas stockpiles since 2004.

Larger Tax Holiday

That phenomenon has helped turn a repatriation holiday from a modest tax cut into a much larger one. In 2004, the congressional Joint Committee on Taxation estimated that the government would forgo $3.3 billion in revenue over 10 years.

This year, the nonpartisan committee projected that a repeat of the 2004 tax holiday with a 5.25 percent rate would cost the Treasury $78.7 billion, in part because companies would shift more profits offshore after a holiday and hold them there in anticipation of another round.

“The long-term consequence of that policy is the current corporate stockpiling of offshore funds in anticipation of another repatriation tax break allowing multinational corporations to use a 5.25 percent tax rate in place of the top 35 percent rate that applies to domestic corporations,” the Levin report says. “Such disparate tax rates punish small and mid-sized domestic corporations that don’t do business offshore by placing them at a competitive disadvantage.”

© Copyright 2022 Bloomberg News. All rights reserved.

A report from U.S. Senator Carl Levin calls a tax holiday for repatriated offshore profits a failed policy that shouldn t be repeated. The report, scheduled to be released tomorrow, was obtained today by Bloomberg News from two people who provided the information on the...
Tuesday, 11 October 2011 07:12 AM
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