The proposal comes through their Foreign Earnings Reinvestment Act, but permanent implementation may be needed to benefit the economy in the long run.
The bipartisan proposal is forwarded as a pragmatic way of providing relief for the faltering economy and aims to bring back funds held overseas.
“The status quo is unacceptable. After months of anaemic growth, one thing is clear, Washington partisanship isn’t doing anything to help our economy rebound,” said Hagan. “Our stagnant economy demands practical, creative and bipartisan solutions right now.”
Incentives are available for companies that use repatriated money to expand their payrolls, therefore providing an incentive to create extra jobs in the US.
This comes in the form of a 5.25% effective repatriation rate if companies expand their US payroll during 2012. Further, there is a penalty for those companies that cut jobs, with a $75,000 inclusion in a company’s gross income calculation for every job role that is removed.
David Forst, practice leader of Fenwick & West’s tax group in the San Francisco and Silicon Valley area, acknowledges the McCain-Hagan plan is a good move, but believes the relief should be made permanent.
“The proposals are a step in the right direction and would cause trapped foreign earnings to be brought back into the US, stimulating the US economy. However, the proposal would not result in permanent tax relief for foreign earnings, therefore the US’s fundamentally anti-competitive tax system against the rest of the world would remain in place,” said Forst.
“It would bring in extra revenues and boost job creation,” he added. “[But] while a one-year holiday is helpful, the US economy would derive significantly greater benefits if the relief is made permanent.”
A similar repatriation tax holiday was implemented in 2004, and opponents of the new bill cite the 2004 tax break as evidence that such a measure would not achieve the objectives outlined by its creators.
“There is no evidence that the previous repatriation tax giveaway put Americans to work, and substantial evidence suggests that it instead grew executive paychecks and drew more money and jobs offshore,” said Senator Carl Levin (Dem-Michigan), chairman of the Senate Parliament Subcommittee on Investigations. “Those who want a new corporate tax break claim it will help rebuild our economy, but the facts are lined up against them.”
There is also a concern relating to the revenues that the tax holiday would bring in. For foreign profits that would have been repatriated regardless of this measure, government would lose out on the vast proportion of revenue they would have gained from the higher rate.
The debate over reform of the tax code continues in the US, with proponents of this proposal likely to advocate a move to a territorial tax system rather than taxing foreign active business income on a worldwide basis.
“US companies report more than $1.2 trillion of permanently reinvested foreign earnings on their public financial statements. Much of this income is trapped abroad by the present US tax system and would be repatriated if the US adopted a territorial tax system similar to other OECD countries,” said Peter Merrill, leader of PwC’s US national economics and statistics practice.
He said these funds would promote investment in the US both directly, by US parent companies, and indirectly, to the extent paid out to shareholders.
“Due to the high tax rate [35%], US multinationals often face a high US tax when they repatriate foreign earnings. By contrast, dividends repatriated by foreign competitors typically are 95% or 100% exempt under their countries’ territorial tax systems,” said Merrill.
There is, however, strong opposition to the McCain-Hagan proposals, and many share Levin’s view that the lessons from the 2004 tax holiday show the relief was unsuccessful in achieving what it was implemented to achieve.
But with groups such as Working to Invest Now in America (WIN America) – a collection of large companies including Apple and Microsoft – campaigning in favour of the measure, the tax holiday is likely to become a temporary reality once again.
“Prospects for some sort of repatriation relief passing Congress are reasonable, but the Obama administration would need to back off of prior opposition,” said Forst.
