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Money accumulated from repatriation tax-holiday strategies can be used to invest in the host nation in the form of facilities, equipment expenditures, or direct investments in local financial markets.

What is a Repatriation Tax Holiday?ARTICLE

By Lou Bertin

Repatriation tax holidays are fiscal stratagems designed to encourage multinational enterprises to transfer money in the form of overseas profits to headquarters nations by allowing them highly reduced – and temporary – tax rates on those profits. The thinking behind tax-holiday strategies is that those transferred funds could be used to invest in the host nation in the form of facilities, equipment expenditures, or direct investments in local financial markets.1

In the U.S., the impetus behind a tax repatriation holiday stems from the fact that U.S.-based multinationals do not pay U.S. corporate tax on their foreign profits until that money is transferred to the U.S., or “repatriated.” Currently, Congress’ Joint Committee on Taxation (JCT) estimates that U.S. multinationals have approximately $2.6 trillion in profits booked offshore.2

Complicating the environment in which any repatriation reforms might be enacted is that U.S. business tax structure is different from that of other nations. Principally, the U.S. is the only G7 nation – and only one of eight of the Organization for Economic Co-Operation and Development’s (OECD’s) 35 members – to tax businesses on worldwide income. Other OECD and G7 countries employ territorial tax systems based on domestic income rather than foreign and domestic income.3

Additionally, the U.S. corporate tax rate is higher than that of all other OECD nations, according a joint paper by the Penn Wharton Budget Model and the Robert D. Burch Center at the University of California at Berkeley. In 2016, for example, U.S. combined federal and state corporate taxes totaled 38.92 percent, while the OECD average was 24.66 percent.4

To illustrate the global complexity of the issue, consider that more than 40 percent of companies worldwide have multiple economic “passports” – they’re part of complex ownership chains with multiple cross-border links involving, on average, three separate jurisdictions, resulting in ownership lines that are blurred, creating a brisk money transfer marketplace within the multinational companies themselves.5

As a result, many U.S.-based multinationals have transferred assets offshore to capture the benefits of these tax inequalities. Among the nations that long have benefitted from their “tax haven” status are Andorra, the Bahamas, Belize, Bermuda, the British Virgin Islands, the Cayman Islands, the Channel Islands, the Cook Islands, Hong Kong, the Isle of Man, Mauritius, Lichtenstein, Monaco, Panama, and St. Kitts and Nevis.6

While it is logical to conclude that funds are merely at rest in the economies of those nations, the reality is often a virtual money transfer: funds often are already invested in the U.S. economy, even as they are owned by foreign subsidiaries of U.S. multinationals.7 For example, an addendum to a 2011 report by the U.S. Senate’s Permanent Subcommittee on Investigations surveyed 27 U.S. multinationals and found that, on average, 46 percent of their undistributed accumulated foreign earnings were invested in U.S. assets.8 Those investments typically are in the form of bank accounts, securities or mutual funds. An even larger percentage may be denominated in U.S. dollars, to mitigate against exchange rate volatility and to satisfy suppliers wishing to be paid in USD.9

There is vigorous debate as to whether or not repatriation tax holidays are effective in generating U.S. investment. The main U.S. Senate report referenced above concluded that the 2004 repatriation tax holiday, which allowed companies to repatriate income held outside the U.S. at an effective tax rate of 5.25 percent, cost the country $3.3 billion in tax revenue and did not deliver the desired effect.10 On the other side of the debate, economists argue that since money cannot be “destroyed” – it can only be spent or invested – the $312 billion repatriated in 2004 had to “end up as either an increase in demand or an increase in investment in the American economy.”11

The Takeaway

Discussion of a repatriation tax holiday that would allow U.S. multinationals to transfer money back to “headquarters” continues to intensify. And with $2.6 trillion at stake, there is much debate over the value any repatriation might have to the U.S. economy. Stay tuned.

Lou Bertin-The Author

The Author

Lou Bertin

Lou Bertin has been a technology journalist, public relations professional and corporate advisor for more than 25 years, providing writing, event moderation, webcasting and podcasting services for publications like CIO magazine and InformationWeek, and corporations such as IBM, Intel, Microsoft and many others.

Sources

1.“What Would A ‘Tax Holiday’ Of Multinationals Foreign Earnings Do?”, Seeking Alpha; https://seekingalpha.com/article/4037376-tax-holiday-multinationals-foreign-earnings
2.“Brady, Neal Highlight Another Reason for Pro-Growth Tax Reform; http://www.budgetmodel.wharton.upenn.edu/issues/2017/1/10/the-economics-of-corporate-and-business-tax-reform-1
3.The Economics of Corporate and Business Tax Reform; The Penn Wharton Budget Model and the Robert D. Burch Center at Berkeley; http://www.budgetmodel.wharton.upenn.edu/issues/2017/1/10/the-economics-of
4.Ibid.
5.World Investment Report 2016; United Nations Conference on Trade and Development; http://unctad.org/en/PublicationsLibrary/wir2016_en.pdf
6.“Tax Haven,” Investopedia; http://www.investopedia.com/terms/t/taxhaven.asp
7.“Repatriating Offshore Funds: 2004 Tax Windfall for Select Multinationals – Report Addendum,” U.S. Senate Permanent Subcommittee on Investigations; https://www.documentcloud.org/documents/603173-repatriation-report-addendum.html
8.Ibid.
9.Ibid.
10.“Repatriating Offshore Funds: 2004 Tax Windfall for Select Multinationals,” U.S. Senate Permanent Subcommittee on Investigations; https://www.hsgac.senate.gov/download/report-psi-majority-staff-report_-repatriating-offshore-funds-oct-2011
11.“The 2004 Corporate Repatriation Tax Amnesty Worked - No Reason Why Trump's Repeat Won't,” Forbes.com; https://www.forbes.com/sites/timworstall/2017/01/02/the-2004-corporate-repatriation-tax-amnesty-worked-no-reason-why-trumps-repeat-wont/

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