US Report Criticizes Repatriation Tax Proposals
A repatriation holiday would have a minimal economic impact and would be the wrong way to pay for the Highway Trust Fund or any other project, according to a new report by the Heritage Foundation.
There have been differing congressional proposals recently to change the tax treatment of the USD2 trillion in untaxed foreign income that American companies have accumulated overseas. The US corporate tax code currently uses the “worldwide” approach, with a deferral system for the active earnings of foreign subsidiaries of US multinational companies, as long as the profits remain abroad. Tax is only payable when these profits are repatriated as dividends to the US.
While the HF pointed out that, as the US is effectively the only country that still taxes its businesses’ foreign earnings, “fixing that glaring flaw by instituting a ‘territorial’ system is a major objective of tax reform.” The goal of achieving a territorial system should, however, not be “confused with changes to repatriation policy that would not have similar economic benefits.”
In its opinion, a repatriation holiday – involving the provision of a concessionary corporate tax rate for repatriated earnings – “would not create jobs by boosting investment domestically because businesses’ incentives for investing would not increase, … [and] it is questionable whether a holiday would lower or raise revenues in the traditional 10-year budget window.”
“Whether it does or does not depends almost entirely on how much foreign income the Joint Committee on Taxation (JCT) anticipates businesses will repatriate over the next decade under current law,” the HF noted. “However, given a one-year or two-year span, there is little doubt that a holiday would shift revenue forward to those years.”
In fact, the JCT recently estimated that a preferential tax rate for repatriated foreign corporate earnings would have a negative fiscal impact over the long-term. It said that if corporations believe that further tax reductions will occur in the future and become a regular part of the tax system, it would create an incentive for businesses to retain more earnings overseas, rather than encourage them to repatriate income, and encourage businesses to locate more income and investment abroad.
The HF also examined the idea of “deemed” repatriation, involving the immediate application of a tax on accumulated foreign earnings, even if the company has no intention to repatriate the profits.
Such a policy, it said, would be a “tax hike, because a portion of the income that would be taxed would be money that businesses decided to permanently invest offshore.” It said it would be a move in the wrong direction as “Congress should be working to eliminate tax on businesses’ foreign earnings through tax reform.”
Overall, the HF stressed that, “even if changes in repatriation policy provided an economic boost or did not raise taxes, it would still be the wrong choice for funding the HTF. Highways have traditionally been funded on the user-pays principle, as exemplified by the gas tax. Congress should not break that commonsense policy by tapping the foreign incomes of multinational businesses.”
“Changes to repatriation policy are best left to tax reform,” it concluded. “Taking changes to policy on previously earned foreign income off the table by misguidedly using them to pay for transportation would make achieving tax reform more difficult.”
