Taxing the $2.5 Trillion in Offshore Profits: What’s Ahead for Repatriation?

With a Trump administration and Republican-controlled Congress that have similarly-aligned goals for tax reform, the likelihood of a tax reform package being enacted in 2017 is higher than it has been in years. A key component of these discussions will be how to tax $2.5 trillion in collective profits that U.S. multinational corporations have parked offshore to avoid paying U.S. taxes.

U.S. multinationals are avoiding up to $718 billion in taxes on this offshore profit cash hoard.

The key reason companies use accounting gimmicks and other maneuvers to book profits offshore is that our corporate tax code allows them to indefinitely defer paying U.S. taxes on their foreign profits until they are officially repatriated to the United States. For example, Apple now holds $216 billion in earnings offshore on which it appears to have paid a tax rate of less than 4 percent, meaning that deferring taxation on these profits has allowed it to avoid an estimated $67 billion in U.S. taxes.

This offshore cash sum and the tax revenue it could generate is no secret to lawmakers. For the last several years, various lawmakers have introduced proposals that would either incentivize or force corporations to repatriate their profits. Unfortunately, most of the proposals would either perpetuate corporate tax avoidance or incentivize corporations to repatriate their current offshore profits but then return to stashing cash offshore in anticipation of another future tax break.

For example, a “repatriation holiday” is a popular proposal floated by Republicans and Democrats that would allow companies to voluntarily repatriate offshore profits at a sharply reduced rate. Similarly, a “deemed repatriation” proposal would levy a one-time mandatory tax (ranging from 8.75 to 14 percent) on the accumulated offshore funds at a reduced rate. For example, President-Elect Donald Trump has proposed a deemed repatriation at a 10 percent rate as part of his tax reform plan, with no plan on how he might treat future offshore earnings. What this means is that under Trump’s plan, companies would be let off the hook for more than $500 billion of the $718 billion in taxes they owe on their offshore earnings, representing a substantial reward to those companies engaged in offshore tax avoidance.

Lawmakers seem to be willing to compromise on this as they are eying a quick fix way to finance much-needed infrastructure improvements at a time when they cannot agree, for example, on how to ensure the Highway Transportation Fund remains solvent in the long-term. One possibility moving forward is that revenues raised from a deemed repatriation could be used to finance infrastructure improvements. Variations of this idea have been proposed by President Obama and members of Congress including Representative John Delaney and Senators Barbara Boxer and Rand Paul. In a recent meeting between Trump advisor Stephen Moore and Republican lawmakers, Moore proposed linking Trump’s 10 percent deemed repatriation with infrastructure spending as one way to make the plan bipartisan. However, many congressional Republicans (including House Ways and Means Committee Chairman Kevin Brady, who is tasked with drafting tax reform legislation) would prefer that revenues from a deemed repatriation be used to lower corporate rates. And if Republicans decide to push through tax reform using “budget reconciliation” (a special legislative process where the threat of a filibuster is eliminated), Democratic support will not be needed to pass tax changes. Other Trump advisors have also suggested new tax credits for corporate infrastructure equity investments, which could potentially offset or eliminate a company’s repatriation tax liability.

Rather than grant corporations a substantial tax break on their offshore earnings to generate a short-term revenue boost, lawmakers should no longer allow companies to defer paying taxes on their foreign earnings. Such a move could curtail offshore tax avoidance and generate substantially more revenue, which could be used to make the public investments in infrastructure, health care and other critical areas that we need.

For additional information on the various repatriation proposals and how they would work, see ITEP’s new Comprehensive Guide to Repatriation Proposals or our related two-page fact sheet What You Need to Know About Repatriation Proposals.