Showdown looms on U.S. overseas profit tax break

Original Link: http://www.reuters.com/article/2011/08/24/us-usa-tax-holiday-idUSTRE77N3UV20110824

By Kevin Drawbaugh

Backed by powerful companies spending millions of dollars, Washington lobbyists are fighting in the marble corridors of Congress for a tax break on $1.5 trillion in profits held overseas to escape the U.S. tax man.

When lawmakers return next month from summer break, powerful high-tech and pharmaceutical companies will step up their push for an overseas profit tax repatriation holiday and pose a test for President Barack Obama. (For a graphic please click on r.reuters.com/fuj43s)

The idea has been kicking around for months, gaining only limited traction, but supporters sense their moment may be near, with the economy sluggish and Obama searching for new ways to ignite business investment and create jobs.

A repatriation tax holiday offers just that, advocates say, although critics contend the proposal's promises of economic stimulus are illusory and serve only to mask a tax break costing the United States $80 billion over 10 years.

The White House, so far, has stood firm against a holiday, refusing to consider it outside the context of making broad changes in the convoluted tax code.

That stance could be strained as the November 2012 elections near with 9.1 percent of Americans unemployed and Obama courting corporate support for his reelection campaign.

STRUGGLING ECONOMY

"As this economy continues to struggle, I think our case gets stronger every day," said Republican Representative Kevin Brady, author of a repatriation tax holiday bill backed by 15 Republicans and eight Democrats in the House of Representatives.

"Lowering that tax rate for a year to bring those dollars home, people don't understand why we're not doing that. Some may view it as a tax break, but others just see these stranded profits that could do a lot of good things," Brady said.

No Senate bill has emerged, but Democratic Senator Kay Hagan is considering one, her spokeswoman said.

"Repatriation is on the table," said Chris Krueger, policy analyst at investment firm MF Global.
Like most analysts, however, he said a new 12-member "super committee" being formed to tackle the federal deficit likely will not embrace a tax holiday, as promoted by a corporate lobbying group called the WIN America campaign.

The main reason? The White House and other Democratic opponents want to use it as leverage as long as they can to gain concessions from corporations on other tax reform issues.

"Repatriation ... is an important bargaining lever - not one to be given away easily by lawmakers," he said.

Congress still feels burned by the last repatriation tax holiday. Approved in 2004 with the backing of President George W. Bush, that tax break did little to boost the economy, despite promises of job-creating investment.

Democratic Representative Lloyd Doggett said another such corporate give-away would simply be a mistake.

"The tax holiday promoted by the WIN America coalition is a real loser for hardworking Americans," Doggett told Reuters.

"It didn't create jobs last time and ... multinational corporations have no intention of using this repatriation tax windfall to create jobs. A bargain tax rate on foreign profits, many hidden in tax havens, would be an incentive for job creation abroad and even more layoffs at home."

INSIDE THE TAX GAME

The repatriation tax holiday fight opens a window into the game of writing tax law in Washington and the tightly knit group of politicians and lobbyists who play it.

* Duke Energy Corp CEO Jim Rogers, a Southerner with ties to Democrats, is a frequent public speaker for WIN America, advocating for the tax holiday. Rogers led a fund-raising committee to bring the 2012 Democratic National Convention to Charlotte, North Carolina, where Duke is based. The company guaranteed a $10 million line of credit for the event.

* On a more private level, lobbyists and aides said, Oracle President Safra Catz and Cisco Systems Inc CEO John Chambers -- both leaders of California high-tech giants -- have met lawmakers to talk up the WIN America cause. Besides Oracle and Cisco, two other WIN America supporters are Apple Inc and Google Inc. Employees of all four of these firms have been generous Obama supporters, altogether donating $1.3 million to his 2008 campaign, according to Sunlight, according to the Sunlight Foundation, a good government watchdog group.

* WIN America has hired dozens of former staffers of congressional tax writing panels, according to Sunlight.

Ex-Congressman Jim McCrery, once the top Republican on the tax-writing House Ways and Means Committee, is lobbying for the group. So is Jeff Forbes, former chief of staff to Senate Finance Committee Chairman Max Baucus, a key player. Baucus played a central role in killing the last attempt to get a repatriation tax holiday approved. He stood firmly against an amendment offered in 2009 by fellow Democratic Senator Barbara Boxer. It failed in a 55-42 vote.

The stance taken by Baucus -- a member of the new deficit "super committee" -- will be crucial this time around for WIN America and its allies, said aides and lobbyists. A Senate Finance Committee aide said only that Baucus "is examining proposals in the context of comprehensive tax reform and the forthcoming deficit reduction efforts."

FIXING THE TAX CODE

Nearly everyone on both sides of the repatriation debate agrees that the tax code, especially the part of it dealing with overseas corporate profits, needs an overhaul.

"The way we tax our multinationals is broken," said Duke Senior Vice President for Tax Keith Butler in an interview, adding that Duke's corporate tax return is 10,000 pages long.

But like other executives backing WIN America, Butler said tax reform will take too long and repatriation is needed now.

"Repatriation would really boost and help the United States now ... We can't wait the two or three years that tax reform might take to get these funds back in the U.S.," he said.

The tale of the overseas profits at stake reaches around the world, from the Paranapanema River in southern Brazil where Duke has a string of hydroelectric dams to a prim office park in Dublin that is home to the Irish subsidiary of Oracle.

Foreign operations like these have generated, in legal ways, an estimated $1.5 trillion in overseas corporate income for U.S. corporations on which no U.S. corporate income tax is paid as long as the funds stay abroad.

The U.S. corporate income tax rate is 35 percent. Profits earned at home in the United States are taxed right away at that rate, though other corporate tax breaks frequently allow large companies to pay a much lower effective rate.

Income earned abroad is a different story. In most cases, taxes on these profits may be deferred. As a result, some global firms have an incentive to put as much income as they can in foreign subsidiaries located in low-tax countries.

When U.S. companies do repatriate overseas profits, they are taxed at the 35-percent rate, minus credits for taxes already paid to their foreign subsidiaries' host countries.

On profits that are not repatriated, only the host-country tax must be paid and U.S. corporate income tax is avoided. The trouble is that, over the years, unrepatriated overseas profits pile up. And analysts say that is no accident.

Credit Suisse estimated in April that S&P 500 companies at the end of 2010 had $1.3 trillion overseas.

Perhaps encouraged by Bush's 2004 repatriation holiday, companies may park profits intentionally abroad "with the hopes of a future tax holiday," Credit Suisse analysts said.

2004 ALL OVER AGAIN?

Congressman Brady's legislation proposes a tax holiday that would let companies repatriate their overseas profits at the bargain-basement tax rate of 5.25 percent, the same rate adopted under Bush's 2004 program.

In 2004 and 2005, 843 corporations brought into the United States almost $362 billion from abroad, according to a 2008 Internal Revenue Service analysis.

Those repatriations "did not lead to an increase in domestic investment, employment or R&D -- even for firms that lobbied for the tax holiday stating these intentions," said a 2009 study by the National Bureau of Economic Research.

Most of the money brought back six years ago went to shareholder dividends and stock buybacks, NBER found.

Strictures on the use of the repatriated funds were written into the 2004 measure, but the NBER study showed that companies found ways to get around them.

Brady's bill would penalize companies that cut their staffs after the repatriation holiday.
The Joint Committee on Taxation, a non-partisan congressional research arm, estimated that a tax holiday similar to Brady's would initially boost U.S. tax revenues as profits entered the country, but would eventually cost taxpayers about $78.7 billion over the next decade.

Critics said the Brady measure would likely work no better than the 2004 law did at ensuring job-creating investment, and that it would only encourage "accumulate to repatriate" overseas tax strategies by U.S. corporations.