Category: Archive

September 11, 2013 01:51 PM | Permalink |

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In July, a letter[1] signed by thirty national organizations and a report[2] from Citizens for Tax Justice (CTJ) both warned members of Congress about a proposal from Congressman John Delaney of Maryland that would have the effect of rewarding corporations that use offshore tax havens to avoid U.S. taxes. Rep. Delaney’s staff responded with a “rebuttal” that is itself based on misinformation about corporate tax law and about the likely effects of the proposal, which would provide a tax amnesty for offshore profits (often euphemistically called a “repatriation holiday”) for corporations that agree to finance an infrastructure bank.

The proposal, H.R. 2084, would allow American corporations to bring profits of their offshore subsidiaries to the U.S. (to “repatriate” offshore profits) without paying the U.S. corporate income tax that would normally be due. In return, the corporations would have to purchase bonds to provide $50 billion of financing for a bank that would fund infrastructure projects in the U.S. How much a corporation could repatriate tax-free would be determined through a bidding process, with a maximum cap of six dollars in offshore profits repatriated tax-free for every one dollar spent on the bonds.

Profits Not Truly “Locked Offshore”

Conversations about this type of proposal begin with a mistaken assumption that Congress should lure to the U.S. the $2 trillion of “permanently reinvested earnings” that American corporations hold in foreign subsidiaries. These are profits that U.S. corporations have generated (or claim to have generated) in foreign countries and on which they have not yet paid U.S. taxes.

As the CTJ report on Delaney’s proposal explains, much, if not most of these “offshore” profits are actually already in the U.S. economy, and nothing prevents our corporations from using them to make investments here. A December 2011 study by the Senate Permanent Subcommittee on Investigations surveyed 27 corporations, including the 15 corporations that repatriated the most offshore cash under the 2004 law, and concluded that in 2010, 46 percent of the “permanently reinvested earnings” held offshore by these corporations were invested in U.S. assets like U.S. bank deposits, U.S. stocks, U.S. Treasury bonds and similar investments.[3]

This fact, which seems to undercut the rationale for a tax amnesty on offshore corporate profits, is not addressed by Congressman Delaney’s rebuttal.

Rewarding the Most Aggressive Corporate Tax Dodgers

As the letter and the CTJ report explain, one of the troubling aspects of Congressman Delaney’s proposal is that it would reward the most aggressive corporate tax dodgers. Often, an American corporation has offshore profits because its offshore subsidiaries carry out actual business activity. But a great deal of the profits that are characterized as “offshore” are really U.S. profits that have been disguised through accounting gimmicks as “foreign” profits generated by a subsidiary (which may be just a post office box) in a country that does not tax profits (i.e., an offshore tax haven). These tax haven profits are the profits most likely to be “repatriated” under such a proposal for two reasons.

First, offshore profits from actual business activities in foreign countries are often reinvested into factories, stores, equipment or other assets that are not easily liquidated in order to take advantage of a temporary tax break, but profits that are booked as “foreign” profits earned by a post office box subsidiary in a tax haven are easier to “move” to the U.S.

Second, profits in tax havens get a bigger tax break when “repatriated” under such a tax amnesty. The U.S. tax that is normally due on repatriated offshore profits is the U.S. corporate tax rate of 35 percent minus whatever was paid to the government of the foreign country. Profits that American companies claim to generate in tax havens are not taxed at all (or taxed very little) by the foreign government, so they might be subject to the full 35 percent U.S. rate upon repatriation — and thus receive the greatest break when the U.S. tax is called off.

Even more troubling, the Delaney proposal gives those corporations that purchase the most bonds and repatriate the most offshore profits (and therefore those likely to be the most aggressive tax dodgers) the power to appoint a majority of the directors of the infrastructure bank.

How Delaney’s “Rebuttal” Misinforms

In a document titled “Rebuttal to Inaccurate Claims on H.R. 2084,” Congressman Delaney’s staff provides the following descriptions of the criticisms of his proposal and responses. Each is based on misinformation or faulty logic, as explained below.  

Delaney staff’s description of opponents’ claim: “H.R. 2084 will not create jobs.”

Delaney staff’s response: “Building infrastructure creates jobs and helps businesses grow. According to conservative estimates used by the Federal Highway Administration every billion in infrastructure investment creates 13,000 jobs, so $750 billion in infrastructure financing would create well over a million jobs. While the past impacts of repatriation on job growth or the effects of broad or theoretical alternatives can be debated – this criticism simply isn’t valid to H.R. 2084. Past repartition efforts were not directly tied to infrastructure investment. This legislation requires that repatriation be chained to infrastructure and job creation.”

The truth about jobs and Rep. Delaney’s proposal:

While infrastructure spending is economically stimulative, this plan is an absurdly wasteful and corrupt way to fund job creation. First, the proposal is designed to give away two dollars in tax breaks for every one dollar spent on infrastructure (and the jobs to build infrastructure) — to give away up to $105 billion in corporate tax breaks in order to raise $50 billion to finance the infrastructure bank. (Up to $300 billion would be repatriated, and we have explained that this is likely to be in the form of offshore profits that have not been taxed at all by any government so under normal rules the full 35 percent U.S. tax rate would apply, and 35 percent of $300 billion is $105 billion.)

Second, given that this proposal would encourage corporations to shift more jobs and profits offshore (as discussed below), its net effect on U.S. job creation could be negative.

Delaney staff’s description of opponents’ claim: “H.R. 2084 creates a repatriation tax holiday.”

Delaney staff’s response: “H.R. 2084 does not create a tax holiday where any company can repatriate any amount of money tax free. Only those companies that purchase infrastructure bonds would be eligible to repatriate any earnings, at rates set competitively to provide taxpayers with the fairest deal.”

The truth about repatriation under Rep. Delaney’s proposal:

Relieving corporations of tax liability on their offshore profits on the condition that they agree make a much smaller payment (whether in taxes or to finance an infrastructure bank) is what reasonable people call a “tax amnesty” or perhaps more euphemistically, a “tax holiday” for offshore corporate profits.

The proposal would allow a corporation to repatriate up to $6.00 of offshore profits tax-free for every one dollar used to purchase bonds to capitalize the infrastructure bank. Each six dollars of offshore profits repatriated under the normal rules would be subject to up to $2.10 of U.S. taxes. (As we have explained, the profits repatriated are likely to be those that have not been taxed by any government and therefore would be subject to the full 35 percent U.S. tax rate under the normal rules.) The proposal would allow up to $6.00 of offshore profits to be tax-free for every $1 invested in the infrastructure bank. That’s considerable tax savings for the participating corporations, and therefore constitutes a “tax amnesty.”

Delaney staff’s description of opponents’ claim: “H.R. encourages corporations to move jobs and profits offshore.”

Delaney staff’s response: “This legislation strictly focuses on the profits that are already offshore, and that all sides of the political spectrum want to come back. H.R. 2084 only uses a small fraction, 10% of the roughly $2 trillion, of the overseas earnings and requires companies to aggressively bid for the right to purchase Infrastructure Bonds. Because of the one-time auction mechanism, a company would be ill-advised to increase their offshoring of jobs or profits. The winning bids will be those that require the highest effective tax rate, and no company can be assured that they will win the auction and be able to purchase the bonds in the first place.”

The truth about offshoring jobs and profits under Rep. Delaney’s proposal:

When Congress provided a tax amnesty for offshore corporate profits in 2004 (it was euphemistically called a “tax holiday” by its supporters back then) several experts pointed out[4] that corporations would be encouraged to shift even more profits offshore if they believed that Congress was likely to do this more than once. Given how easy it is to make U.S. profits appear to be profits generated in Bermuda, the Cayman Islands, Ireland, or some other tax haven, corporations would reasonably conclude that they should artificially shift profits to such tax havens and then wait for Congress to enact the next tax amnesty for offshore profits. Any attempt by Congress to repeat such a tax amnesty, even a limited one, reinforces the precedent set in 2004 that Congress is willing to provide such breaks more than once and encourages companies, particularly the very large multinational corporations likely to participate, to shift even more profits (and possibly operations and jobs) offshore.

Delaney staff’s description of opponents’ claim: “H.R. 2084 gives control of the Board to corporate tax dodgers.”

Delaney staff’s response: “This legislation has strong conflict of interest provisions that explicitly prohibit Board appointees from having financial ties with the purchasers of the Infrastructure Bonds. This claim is simply false.

Line 3, Pg. 7 (H.R. 2084) CONFLICTS OF INTEREST.—No member of the Board may have a financial interest in, or be employed by, a Qualified Infrastructure Project (‘‘QIP’’) related to assistance provided under this section or any entity that has purchased bonds under subsection (e).”

The truth about who controls the bank under Rep. Delaney’s proposal:

As we explained, the profits most likely to be repatriated under such a deal are those profits artificially shifted into offshore tax havens. These profits are subject to the highest U.S. taxes when repatriated under the normal rules (because they have not been subject to foreign taxes that would reduce their U.S. tax liability). And offshore profits generated in a country with a developed economy are more likely to be reinvested in something like a factory or equipment or buildings in that country and thus difficult to repatriate, while offshore profits that (on paper) are generated by a subsidiary that is just a post office box in, say, Bermuda, or easier to “move” from one country to another. In other words, the corporations most likely to benefit from the proposal are the most aggressive corporate tax dodgers.

And the corporations that benefit from the proposal are given the right to nominate the majority of the board of directors of the infrastructure bank.

Line 16, Pg. 5 (H.R. 2084)
(C) INITIAL MEMBERS- The Board shall initially consist of the following members, who shall be appointed not later than the end of the 60-day period beginning on the date that bonds are issued under subsection (e):

(i) Four members, appointed by the President, by and with the advice and consent of the Senate.

(ii) Seven additional members, appointed one each by the seven entities purchasing the largest amount of bonds (by aggregate face amount of bonds purchased) under subsection (e).

 

(Emphasis added.)

 

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[1] Americans for Tax Fairness press release, “Corporate Tax Amnesty Bill to Fund an Infrastructure Bank Slammed in Letter to U.S. House of Representatives,” July 16, 2013. http://www.americansfortaxfairness.org/press/2013/07/16/corporate-tax-amnesty-bill-to-fund-an-infrastructure-bank-slammed-in-letter-to-u-s-house-of-representatives/

 

[2] Citizens for Tax Justice, “Delaney’s Delusion: Latest Proposed Tax Amnesty for Repatriated Offshore Profits Would Create Infrastructure Bank Run by Corporate Tax Dodgers,” June 25, 2013. http://ctj.org/ctjreports/2013/06/delaneys_delusion.php 

 

[3] United States Senate, Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, “Offshore Funds Located Onshore: Majority Staff Report Addendum,” December 14, 2011. http://www.hsgac.senate.gov/download/report-addendum_-psi-majority-staff-report-offshore-funds-located-onshore

 

[4] Citizens for Tax Justice, “Will Congress Make Itself a Doormat for Corporations that Avoid U.S. Taxes?,” January 30, 2009 https://ctj.sfo2.digitaloceanspaces.com/pdf/repatriation.pdf

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September 5, 2013 04:26 PM | Permalink |

Memphis-Based Firm Shifted Hundreds of Millions Offshore Last Year

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In November of 2011, Citizens for Tax Justice released a report analyzing the federal income taxes paid by hundreds of profitable Fortune 500 corporations during the three-year period between 2008 and 2010. The report identified 78 companies that had managed to avoid paying any federal income tax in at least one year over this period. FedEx was one of these companies. The report also showed that over the three-year period as a whole, FedEx paid an effective tax rate of just 0.9 percent on nearly $4.3 billion of US profits. This brief extends our previous analysis to include fiscal years 2011 and 2012, and finds that the company’s tax rate for the five-year period remains quite low, at 4.2 percent.

The annual reports filed by FedEx with the Securities and Exchange Commission make it possible to calculate the federal and foreign income tax rates paid by the company each year. The table at right shows our estimates of the US pretax income, current federal income tax and effective tax rate for FedEx in each of the past five years.

Our analysis shows that FedEx has been very successful in reducing its tax rate well below the statutory 35 percent federal income tax rate. In particular:

• Between 2008 and 2012, FedEx reported $9.381 billion in US pretax income, and paid just $395 million in current federal income taxes. This computes to a 4.2 percent effective tax rate over this period.
• In two years during this period, 2008 and 2011, the company actually didn’t pay a dime in federal income taxes, instead enjoying tax rebates of $38 million in 2008 and $135 million in 2011.

While it is difficult to know exactly which tax breaks the company claimed to achieve these low tax rates, a close analysis of the company’s annual reports suggests that accelerated depreciation tax breaks, which allow companies to write off the cost of capital investments substantially faster than they actually wear out, is the main reason for the company’s low taxes. Accelerated depreciation is a long-standing tax break that Congress has acted to expand substantially in the past decade.

FedEx also publishes estimates of the taxes it pays to foreign governments on its foreign pretax income. These data show that over the past five years, the company paid a much higher tax rate to other nations on its foreign income than it paid to the federal government on its US income.

 

 

 

 

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August 21, 2013 02:27 PM | Permalink |

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In recent years, the corporate tax reform debate in the nation’s capital has been invaded by an army of acronyms such as T.I.E., A.C.T. and R.A.T.E., representing diff¬erent businesses and corporate interest groups. These groups seek to rebrand and build momentum for a corporate tax reform that benefits corporate rather than public interests. In this report we identify the nine lobby groups most actively and publicly advocating for business interests in the corporate tax debate: the Alliance for Competitive Taxation (ACT), Businesses United for Interest and Loan Deductibility (BUILD), Campaign for a Home Court Advantage (a campaign by the Business Roundtable), Coalition for Fair Effective Tax Rates, Fix the Debt, Let’s Invest for Tomorrow (LIFT) America, Reforming America’s Taxes Equitably (RATE), Tax Innovation Equality, and the WIN America Campaign. We also identify the ten U.S. corporations most aggressively pursuing tax reform through these groups based on each of the company’s participation in four or more such coalitions. Though the specific goals of these groups vary, there are common threads between them. For example, five of the nine groups explicitly support moving to a territorial tax system, which would exacerbate corporate tax avoidance overseas and promote the offshoring of jobs.  Four of the groups explicitly support revenue-neutral tax reform. And, the WIN America Campaign, BUILD, and TIE each support either protecting or implementing very specific tax breaks that would benefit their corporate backers.  For a full inventory of the groups’ policy positions see Table 1. Based just on the lists of corporate members released by these groups (many remain private), they represent at least 359 different corporations and 186 different trade associations. Further, 87 of the corporations are actually supporters of two or more of these corporate tax lobbying efforts, with 31 supporting as many as 3 or more of these groups.  See Table 2 for breakdown of the most active corporations and which groups they belong to.Not surprisingly, many of the companies behind these corporate tax reform coalitions already pay little or even nothing in corporate taxes. See Table 3 for the six corporations that back multiple lobbies for lower taxes even as they paid nothing in corporate income taxes over the 2008-2010 period. See Table 4 for the four corporations that back multiple lobbies supporting a territorial tax system and/or a repatriation holiday and have billions in offshore cash for which they have paid almost nothing so far in taxes. By their own estimates, these four companies admit that they would have to pay almost $40 billion combined in taxes if they were to bring their offshore money back to the United States.

In recent years, the corporate tax reform debate in the nation’s capital has been invaded by an army of acronyms such as T.I.E., A.C.T. and R.A.T.E., representing different businesses and corporate interest groups. These groups seek to rebrand and build momentum for a corporate tax reform that benefits corporate rather than public interests. 

In this report we identify the nine lobby groups most actively and publicly advocating for business interests in the corporate tax debate: the Alliance for Competitive Taxation (ACT), Businesses United for Interest and Loan Deductibility (BUILD), Campaign for a Home Court Advantage (a campaign by the Business Roundtable), Coalition for Fair Effective Tax Rates, Fix the Debt, Let’s Invest for Tomorrow (LIFT) America, Reforming America’s Taxes Equitably (RATE), Tax Innovation Equality, and the WIN America Campaign. 

We also identify the ten U.S. corporations most aggressively pursuing tax reform through these groups based on each of the company’s participation in four or more such coalitions. 

Though the specific goals of these groups vary, there are common threads between them. For example, five of the nine groups explicitly support moving to a territorial tax system (PDF), which would exacerbate corporate tax avoidance overseas and promote the offshoring of jobs.  Four of the groups explicitly support revenue-neutral tax reform (PDF). And, the WIN America Campaign, BUILD, and TIE each support either protecting or implementing very specific tax breaks that would benefit their corporate backers.  For a full inventory of the groups’ policy positions see Table 1. 

Based just on the lists of corporate members released by these groups (many remain private), they represent at least 359 different corporations and 186 different trade associations. Further, 87 of the corporations are actually supporters of two or more of these corporate tax lobbying efforts, with 31 supporting as many as 3 or more of these groups.  See Table 2 for breakdown of the most active corporations and which groups they belong to.

Not surprisingly, many of the companies behind these corporate tax reform coalitions already pay little or even nothing in corporate taxes. See Table 3 for the six corporations that back multiple lobbies for lower taxes even as they paid nothing in corporate income taxes over the 2008-2010 period. See Table 4 for the four corporations that back multiple lobbies supporting a territorial tax system and/or a repatriation holiday and have billions in offshore cash for which they have paid almost nothing so far in taxes. By their own estimates, these four companies admit that they would have to pay almost $40 billion combined in taxes if they were to bring their offshore money back to the United States.

Table 1

 

Table 2

 

Table 3

 

Table 4

 

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July 22, 2013 04:58 PM | Permalink |

This report evaluates the ten largest tax expenditures for individuals based on progressivity and effectiveness in achieving non-tax policy goals – which include subsidizing home ownership and encouraging charitable giving, increasing investment, encouraging work, and many other stated goals.

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July 19, 2013 12:26 PM | Permalink |

The corporate income tax is a progressive source of revenue and Congress should increase this revenue by limiting or eliminating breaks that allow large, profitable corporations to avoid taxation. The most important of these are breaks for corporate profits that are generated offshore or claimed to be generated offshore. Lawmakers should also oppose proposals discussed today that would expand these breaks and result in more corporations relying on offshore tax havens.

Read the presentation.

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June 25, 2013 11:45 AM | Permalink |

Latest Proposed Tax Amnesty for Repatriated Offshore Profits Would Create Infrastructure Bank Run by Corporate Tax Dodgers

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Congressman John Delaney, a Democrat from Maryland, has proposed to allow American corporations to bring a limited amount of offshore profits back to the U.S. (to “repatriate” these profits) without paying the U.S. corporate tax that would normally be due. This type of tax amnesty for repatriated offshore profits is euphemistically called a “repatriation holiday” by its supporters. The Congressional Research Service has found that a similar proposal enacted in 2004 provided no benefit for the economy and that many of the corporations that participated actually reduced employment.[1]

Rep. Delaney seems to believe his bill (H.R. 2084) can avoid that unhappy result by allowing corporations to repatriate their offshore funds tax-free only if they also fund a bank that finances public infrastructure projects, which he believes would create jobs in America. As explained below, this is a strange and problematic way to fund infrastructure projects. In addition, Delaney’s bill will provide the greatest benefits to corporations that are engaging in accounting schemes to make their U.S. profits appear to be generated in offshore tax havens, further encouraging such tax avoidance and resulting in a revenue loss in the long-run. Incredibly, a super-majority of the infrastructure bank’s board of directors would, under Delaney’s bill, be chosen by the corporations that receive the most tax breaks.

“Offshore” Profits Are Not “Locked” Offshore

Some members of Congress, pundits and corporate lobbyists claim we need a tax amnesty to lure to the U.S. the $2 trillion of “permanently reinvested earnings” that American corporations hold in foreign subsidiaries. These are profits that U.S. corporations have generated (or claim to have generated) in foreign countries and on which they have not yet paid U.S. taxes. Proponents of a repatriation tax amnesty argue that forgiving the U.S. tax that is normally due when these profits are brought to the U.S. will get this money “back” into the U.S. economy.

But much, if not most of these “offshore” profits are actually already in the U.S. economy, and nothing prevents our corporations from using them to make investments here. A December 2011 study by the Senate Permanent Subcommittee on Investigations surveyed 27 corporations, including the 15 corporations that repatriated the most offshore cash under the 2004 law, and concluded that in 2010, 46 percent of the “permanently reinvested earnings” held offshore by these corporations were invested in U.S. assets like U.S. bank deposits, U.S. stocks, U.S. Treasury bonds and similar investments.[2] In other words, U.S. corporations are free to invest their funds in the U.S. economy.

The only thing corporations are unable to use their offshore cash for are dividends to their shareholders. But even this is allowed if the corporations simply pay the U.S. tax that is due — which is equal to the U.S. corporate income tax rate of 35 percent minus whatever the corporation has already paid to the government of the foreign country where the profits are said to be generated.

“Offshore” Profits Largely Represent Profits Generated in the U.S.

Some of these offshore profits really are generated in another country. For example, an American corporation may have a subsidiary in France that makes cars and sells them to French citizens, generating profits in France that the subsidiary there is likely to reinvest in its factories and other assets there.

But in many other situations, an American corporation generates profits in the U.S. but uses accounting gimmicks to tell the IRS that they are generated by a subsidiary in a country with no corporate tax or a very low corporate tax (an offshore tax haven). Often this subsidiary company carries out no actual business and consists of little more than a post office box.

How do we know that the profits our corporations claim to have generated in low-tax or no-tax countries do not represent any real business activity? Because most countries where Americans corporations are likely to carry out real business — countries like France, Germany, Japan and others with developed economies and consumers who buy our products — have a corporate tax. On the other hand, most of the countries with a very low corporate tax or no corporate tax are tiny economies that cannot be the location for very much legitimate business.

Luxembourg and Bermuda serve as two examples of tax havens. The Congressional Research Service recently found that the profits that American corporations claim (to the IRS) to have earned through their subsidiaries in Luxembourg in 2008 equaled 208 percent of that country’s gross domestic product (GDP). That’s another way of saying American corporations claim to have earnings in Luxembourg that are twice as large as that nation’s entire economy, which is obviously impossible. The profits that American corporations claimed to have earned through subsidiaries in Bermuda equaled 1000 percent of that tiny country’s economy.[3] It is clear that most of the profits American corporations claim are earned by their subsidiaries in these tax havens are not the result of any real business activity there.

Greatest Benefits of Tax Amnesty Go to the Worst Corporate Tax Dodgers

Unfortunately, the profits artificially shifted to offshore tax havens are the profits that American corporations are most likely to “repatriate” under the type of tax amnesty enacted in 2004 and under the measure proposed by Rep. Delaney. An October 2011 study by the Senate Permanent Subcommittee on Investigations surveyed 20 corporations, including the 15 that repatriated the most offshore funds under the 2004 measure, and found the following:

The data collected by the Subcommittee survey shows that a significant amount of the repatriated funds under Section 965 flowed from tax haven jurisdictions, including the Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Costa Rica, Hong Kong, Ireland, Luxembourg, Netherlands Antilles, Panama, Singapore, and Switzerland. Of the 19 corporations surveyed, seven or 37% repatriated between 90 and 100% of funds from tax haven jurisdictions… Of the remaining 12 corporations surveyed by the Subcommittee, five repatriated from 70% to 89% of their funds from tax havens; three repatriated between 30 and 69% of their funds from tax havens; two repatriated around 7%; and two repatriated less than 1%.[4]

There are at least two reasons why profits artificially shifted into offshore tax havens are the most likely to be “repatriated” under this type of tax amnesty. First, the offshore profits that result from real business activity (like the profits generated by an American car manufacturer in France in the hypothetical example given above) are typically reinvested in factories or training the French workforce or in some other way. The U.S. corporation that owns that subsidiary in France cannot easily bring the “permanently reinvested earnings” back to the U.S. because that would require selling factory equipment or other similar assets.

But the “offshore” profits that are claimed to be generated by a subsidiary that is really just a post office box in a tax haven like Bermuda or Luxembourg are much easier to “move” because they don’t represent any real investments in the foreign country.

The second reason is that profits in tax havens get a bigger tax break when “repatriated” under such a tax amnesty. Again, the U.S. tax that is normally due on repatriated offshore profits is the U.S. corporate tax rate of 35 percent minus whatever was paid to the government of the foreign country. Profits that American companies claim to generate in tax havens are not taxed at all (or taxed very little) by the foreign government, so they might be subject to the full 35 percent U.S. rate upon repatriation — and thus receive the greatest break when the U.S. tax is called off.

The Proposal Will Encourage Corporations to Shift Even More Profits into Tax Havens, Causing Revenue Loss in the Long-Run

Rep. Delaney’s bill specifically states that part of the mission of the infrastructure bank’s board of directors is “to at all times make clear that no taxpayer money supports the AIF [the infrastructure bank] or ever will.” But the infrastructure bank will cost taxpayers, and it would be far more sensible to finance the infrastructure bank with traditional direct government spending.

To understand why, note that U.S. corporations have shifted profits offshore at a greater rate since the 2004 measure was enacted.[5] This means a greater amount of corporate profits are not subject to the U.S. corporate tax.

Indeed, in 2004, many critics argued that the measure, which  temporarily taxed repatriated offshore corporate profits at a tiny rate of just 5.25 percent, would encourage corporations to artificially shift even more profits into tax havens in anticipation for the next “repatriation holiday” enacted by Congress.

This fear becomes particularly warranted if Congress demonstrates that it is willing to enact such measures multiple times less than a decade apart. In 2011, as some members of Congress discussed enacting a second repatriation tax amnesty like the 2004 measure, the non-partisan Joint Committee on Taxation (JCT) concluded that this would cost $79 billion over a ten-year period partly because it would encourage American corporations to artificially shift even more profits offshore in anticipation of the next tax amnesty.[6]

Delaney’s Proposed Infrastructure Bank Would Be Controlled by the Most Aggressive Corporate Tax Dodgers

There are some peculiar features of Rep. Delaney’s bill that lawmakers should consider. Rather than temporarily allowing American corporations to pay a corporate tax rate of just 5.25 percent on repatriated profits (as the 2004 measure did), Delaney’s proposal would temporarily tax repatriated profits at a rate of zero percent — if the corporation agreed to buy bonds to fund an infrastructure bank.

Corporations would be allowed to repatriate a certain number of dollars of offshore profits for each dollar it spends on purchasing bonds. The exact ratio would be determined by a bidding process, with the bonds (and the tax amnesty) going to those corporations offering the lowest bids. (The proposal would not allow bids for repatriation of more than six dollars in offshore profits for each dollar of bonds purchased.) The total amount of bonds issued to finance the bank would be $50 billion.

The bank would be controlled by a board of directors with 11 members. Four of those members would be appointed by the President and approved by the Senate. Delaney’s bill also instructs that the board would include “Seven additional members, appointed one each by the seven entities purchasing the largest amount of bonds….” Since the amount of bonds purchased would be linked to the amount of offshore profits a corporation repatriates, this means that those corporations that repatriate the most under the proposal would effectively control the board of directors and thus the infrastructure bank.

Because the profits most likely to be repatriated under the measure are those profits artificially shifted into offshore tax havens (as explained above) this means that the most aggressive corporate tax dodgers would effectively control the infrastructure bank.

Delaney’s Proposal Shows How Far We Are from Real Tax Reform

Perhaps the worst aspect of Rep. Delaney’s proposal is that it signals an obvious misunderstanding of, or indifference to, the fundamental problems with our corporate tax system, which is in desperate need of reform and which would become more dysfunctional under this proposal.

The main reason U.S. corporations have so much in “permanently reinvested earnings” offshore is the rule allowing American corporations to “defer” paying their U.S. taxes on those profits until they are repatriated. Deferral essentially provides a benefit for holding profits offshore, or at least convincing the IRS that they are offshore.

There is a broader debate taking place right now about how the tax system could be reformed to address this problem and several others. The most logical solution would be to repeal “deferral” so that U.S. corporations pay U.S. taxes on all their profits when they are earned (minus any corporate income taxes paid on these profits to foreign governments).

Many members of Congress, including the chairman of the House Ways and Means Committee, propose to move in the opposite direction and permanently exempt the offshore profits of U.S. corporations from U.S. taxes. This type of permanent exemption for offshore corporate profits is often called a “territorial” system, whereas a temporary exemption for offshore corporate profits is called a “repatriation holiday.”

We have argued elsewhere that if allowing American corporations to “defer” paying U.S. taxes on their offshore profits has encouraged them to shift jobs and profits offshore, then completely exempting these profits from U.S. taxes will logically increase those terrible incentives.[7]

This is true even if the exemption is a temporary one (a “repatriation holiday”), because corporations will come to expect it to be repeated. Even worse, corporate CEOs will understand that Congress is not even close to enacting a real tax reform that cracks down on offshore profit-shifting by corporations.

 

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[1] Despite provisions that were supposed to require repatriated funds to be used for investment and job creation, the Congressional Research Service concluded that the offshore profits repatriated under the 2004 tax amnesty went to corporate shareholders and not towards job creation. In fact, many of the companies that benefited the most actually reduced their U.S. workforces. Donald J. Maples, Jane G. Gravelle, Congressional Research Service, “Tax Cuts on Repatriation Earnings as Economic Stimulus: An Economic Analysis,” May 27, 2011. https://ctj.sfo2.digitaloceanspaces.com/pdf/crs_repatriationholiday.pdf

[2] United States Senate, Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, “Offshore Funds Located Onshore: Majority Staff Report Addendum,” December 14, 2011. http://www.hsgac.senate.gov/download/report-addendum_-psi-majority-staff-report-offshore-funds-located-onshore

[3] Mark P. Keightley, “An Analysis of Where American Companies Report Profits: Indications of Profit Shifting,” Congressional Research Service, January 18, 2013.

[4] United States Senate, Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, “Repatriating Offshore Funds: 2004 Tax Windfall for Select Multinationals: Majority Staff Report,” October 11, 2011. http://www.hsgac.senate.gov/download/report-psi-majority-staff-report_-repatriating-offshore-funds-oct-2011

[5] Citizens for Tax Justice, “Data on Top 20 Corporations Using Repatriation Amnesty Calls into Question Claims of New Democrat Network,” August 26, 2011. http://ctj.org/ctjreports/2011/08/data_on_top_20_corporations_using_repatriation_amnesty_calls_into_question_claims_of_new_democrat_ne.php; Citizens for Tax Justice, “Apple, Microsoft and Eight Other Corporations Each Increased Their Offshore Profit Holdings by $5 Billion or More in 2012,” March 11, 2013, http://ctj.org/ctjreports/2013/03/apple_microsoft_and_eight_other_corporations_each_increased_their_offshore_profit_holdings_by_5_bill.php; Citizens for Tax Justice, “Apple Is Not Alone,” June 2, 2013. http://ctj.org/ctjreports/2013/06/apple_is_not_alone.php

[6] Letter from the Thomas A. Barthold, Joint Committee on Taxation to Congressman Lloyd Doggett, April 15, 2011. https://ctj.sfo2.digitaloceanspaces.com/pdf/jct_repatriationholiday.pdf.

[7] Citizens for Tax Justice, “Congress Should End ‘Deferral’ Rather than Adopt a ‘Territorial’ Tax System,” March 23, 2011. http://ctj.org/ctjreports/2011/03/congress_should_end_deferral_rather_than_adopt_a_territorial_tax_system.php

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June 10, 2013 10:38 AM | Permalink |

Read this fact sheet in PDF.

Some observers have asked why we need a corporate income tax in addition to a personal income tax. The argument often made is that corporate profits eventually make their way into the hands of individuals (in the form of stock dividends and capital gains on sales of stock) where they are subject to the personal income tax, so there is no reason to also subject these profits to the corporate income tax. Some even suggest that the $4.8 trillion[1] that the corporate income tax is projected to raise over the next decade could be replaced by simply raising personal income tax rates or enacting some other tax. This is a deceptively simple argument that ignores the massive windfalls that wealthy individuals would receive if there was no corporate income tax.

Here are three of the biggest problems with repealing the corporate income tax:

First, a business that is structured as a corporation can hold onto its profits for years before paying them out to its shareholders, who only then (if ever) will pay personal income tax on the income. With no corporate income tax, high-income people could create shell corporations to indefinitely defer paying individual income taxes on much of their income.

Second, even when corporate profits are paid out (as stock dividends), only a fraction are paid to individuals rather than to tax-exempt entities not subject to the personal income tax.

Third, the corporate income tax is ultimately borne by shareholders and therefore is a very progressive tax, which means any attempt to replace it with another tax would likely result in a less progressive tax system.

1. Without a Corporate Income Tax, Retained Profits Would Not Be Taxed. As a Result, High-Income People Could Defer Paying Personal Income Taxes on Much of Their Income Indefinitely.

The first problem is that corporations can retain their profits and reinvest them rather than paying out dividends. If a corporation does this for years before paying out dividends, then, without a corporate income tax, the business’s profits would not be taxed at all over that period. (In contrast, the interest that accrues on an ordinary savings account owned by a typical middle-income person is taxed each year, which reduces the rate at which the savings grow.)

If Congress simply repealed the corporate income tax and did nothing else, this would create an enormous personal income tax loophole. High-income individuals would no longer want to be employed directly by businesses or make their investments directly. Instead they would set up shell corporations that sell the individuals’ services or make investments for them. The result would be that income could go untaxed indefinitely, until it is taken out of the shell companies to be spent. Even extremely complex rules and heavy enforcement by the IRS might be unable to prevent this type of tax avoidance. Thus, without a corporate income tax, the individual income tax on high-income people could be undermined.

2. Two-Thirds of Corporate Profits Are Never Subject to the Personal Income Tax.

Some people may believe that Congress can repeal the corporate income tax and address the retained profits problem described above by requiring corporations to follow the rules for “pass-through” businesses, which, under the existing rules, cannot avoid taxes by retaining profits. (“Pass-through” businesses are the companies that are not subject to the corporate income tax, and their profits are allowed to “pass through” to the individuals who own them, meaning the profits are subject to only the personal income tax.) Some people may believe that if all businesses were pass-through businesses, then everything would be fine because corporate profits would eventually be subject to the personal income tax.

But this is wrong. Two-thirds of the profits that corporations pay out today (as stock dividends) go to tax-exempt entities like retirement plans and university endowments.[2] In other words, if the personal income tax was the only tax applied to the profits of large, currently taxable corporations, then two-thirds of those profits would never be taxed.[3]

3. The Corporate Income Tax Is Borne by Shareholders and Thus Very Progressive.

Taken as a whole, America’s tax system is just barely progressive.[4] It would be considerably less progressive if the corporate income tax was repealed. Most, if not all, of the corporate income tax is borne by shareholders in the form of reduced stock dividends, and high-income Americans receive the lion’s share of these dividends. Corporate leaders sometimes assert that corporate income taxes are really borne by workers or consumers. But virtually all tax experts, including those at the Congressional Budget Office, the Congressional Research Service and the Treasury Department, have concluded that the owners of stock and other capital ultimately pay most corporate taxes.[5] Further, corporate leaders would not lobby Congress to lower these taxes if they did not believe their shareholders (the owners of corporations) ultimately paid them. (In contrast, corporations do not lobby for lower payroll taxes, which are borne by workers).

 

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[1] Congressional Budget Office, “Updated Budget Projections: Fiscal Years 2013 to 2023,” May 14, 2013. http://www.cbo.gov/publication/44172

[2] According to data from the Bureau of Economic Analysis and our calculations, $1.9 trillion in corporate stock dividends were paid, excluding inter-corporate dividend payments, over the 2004-2008 period (and excluding dividends from non-taxable, “pass-through” S corporations). But the IRS reports that only $0.6 trillion in such corporate stock dividends were reported on individual tax returns (as “qualified” dividends). The remaining corporate stock dividends were not subject to personal income tax, because they were paid to individuals’ accounts with tax-exempt pension plans, other retirement plans, and certain life insurance arrangements. That means that two-thirds of personal dividends from corporate stock are not subject to personal income tax. (See BEA National Income and Product Account Tables 1.16 and 7.10 and the related (albeit somewhat confusing) table accompanying BEA FAQ #318, all at www.bea.gov. See also annual data on Individual Income Tax Returns for 2004–08 from the Internal Revenue Service at www.irs.gov.)

[3] Contributions to retirement funds (pensions, 401k’s, etc.) are not taxable as earnings when the contributions are made, thus avoiding both income and payroll taxes. Distributions during retirement are taxable. But, assuming a constant tax rate, this is the mathematical equivalent of taxing the contributions when made and exempting the distributions from tax. (This is why analysts treat tax-deductible IRA contributions as the equivalent of “Roth IRAs,” where the contributions are not deductible, but the distributions are tax-exempt.) In fact, since tax rates on retirement distributions from pensions, 401k’s, etc. are likely to be taxed at a lower tax rate than the tax rate avoided by the tax exemption for contributions, the actual tax rate on retirement income is likely to be negative.

[4] Citizens for Tax Justice, “Who Pays Taxes in America in 2013?” April 1, 2013, http://ctj.org/ctjreports/2013/04/who_pays_taxes_in_america_in_2013.php

[5] Jennifer C. Gravelle, “Corporate Tax Incidence: Review of General Equilibrium Estimates and Analysis,” Congressional Budget Office, May 2010, http://www.cbo.gov/ftpdocs/115xx/doc11519/05-2010-Working_Paper-Corp_Tax_Incidence-Review_of_Gen_Eq_Estimates.pdf; Gravelle, Jane G. and Kent A. Smetters. 2006. “Does the Open Economy Assumption Really Mean That Labor Bears the Burden of a Capital Income Tax.” Advances in Economic Analysis & Policy vol. 6:1.

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June 2, 2013 04:43 PM | Permalink |

Read this Report in PDF.

Dell, Microsoft and Fifteen Other Fortune-500 Corporations’ Financial Reports Indicate Their Offshore Profits Are In Tax Havens; Hundreds More Likely Do the Same

Recent Congressional hearings on the international tax-avoidance strategies pursued by the Apple corporation documented the company’s strategy of shifting U.S. profits to offshore tax havens. But Apple is hardly the only major corporation that appears to be engaging in offshore-tax sheltering: seventeen other Fortune 500 corporations disclose information, in their financial reports, that strongly suggests they have paid little or no tax on their offshore holdings. It’s likely that hundreds of other Fortune 500 companies are also engaging in similar strategies to take advantage of the rule allowing U.S. companies to “defer” paying U.S. taxes on their offshore income.

How We Know When Multinationals’ Offshore Cash is Largely in Tax Havens

Under current law, corporations can indefinitely defer paying U.S. income taxes on their offshore profits. Multinational corporations with offshore profits sometimes disclose, in their financial reports, the amount of tax they would pay if there were no “deferral” and their offshore profits were taxable in the United States.[1]  But this potential tax rarely amounts to the full 35 percent U.S. corporate tax rate, since these companies typically have already paid some foreign income taxes on these foreign profits when they were earned. Companies are allowed a “foreign tax credit” against their U.S. tax when and if the profits are subject to U.S. tax. So a company that has already paid (for example) a 25 percent tax rate on its offshore income would only pay the difference between that amount and the U.S. corporate tax rate of 35 percent (in this example, 10 percent) when that income is repatriated to the U.S. 

Apple is one of eighteen Fortune 500 companies that disclose, in their latest annual reports, that they would pay at least a 30 percent U.S. tax rate on their offshore income if repatriated. This figure is a clear indication that very little tax has been paid on those profits to any government—which in turn is an indicator that much of these offshore profits are being stashed in tax havens such as Bermuda and the Cayman Islands.

The table to the right shows the disclosures made by these eighteen corporations in their most recent annual financial reports. In particular:

• At the end of their most recent fiscal year, these companies collectively reported $283 billion in cash and cash equivalents parked offshore.
• Without “deferral,” however, these companies each estimate that they would pay a U.S. tax rate of at least 30 percent on their offshore stash—a clear indication that they have paid very little tax on these profits to any government.
• These companies include two of Apple’s competitors, Microsoft and Dell, but also include an array of other industries. Pharmaceutical giant Eli Lilly, the clothing manufacturer Nike, and the financial firm American Express all indicate that they would pay a tax rate of at least 30 percent on repatriation of their foreign profits.

Hundreds of Other Fortune 500 Corporations Don’t Disclose This Information

These 18 companies are not alone in shifting their profits to low-tax havens—they’re only alone in disclosing it. A total of 290 Fortune 500 corporations have disclosed, in their most recent financial reports, holding some of their income as “permanently reinvested” foreign profits. Yet the vast majority of these companies—235 out of 290—declined to disclose the U.S. tax rate they would pay if these offshore profits were repatriated. (55 corporations, including the 18 companies shown on this page, disclose this information. A full list of the 55 companies is published in the PDF of this report.) The non-disclosing companies collectively hold almost $1.3 trillion in unrepatriated offshore profits.

Accounting standards require publicly held companies to disclose the U.S. tax they would pay upon repatriation of their offshore profits—but these standards also provide a loophole allowing companies to assert that calculating this tax liability is “not practicable.”  Almost all of the 235 non-disclosing companies use this loophole to avoid disclosing their likely tax rates upon repatriation—even though these companies almost certainly have the capacity to estimate these liabilities.

20 of the Biggest “Non-Disclosing” Companies Hold $720 Billion Offshore

The table at right shows the 20 non disclosing companies with the biggest offshore stash at the end of the most recent fiscal year. These 20 companies held $720 billion in unrepatriated offshore income—more than half of the total income held by the 235 “non-disclosing” companies. These companies also disclose, elsewhere in their financial reports, owning subsidiaries in known tax havens. For example:

• General Electric disclosed holding $108 billion offshore at the end of 2012. GE has subsidiaries in the Bahamas, Bermuda, Ireland and Singapore, but won’t disclose how much of its offshore cash is in these low-tax destinations. [Although some of it is clearly there; see text box below.]
• Pfizer has subsidiaries in Bermuda, the Cayman Islands, Ireland, the Isle of Jersey, Luxembourg and Singapore, but does not disclose how much of its $73 billion in offshore profits are stashed in these tax havens.
• Merck has 14 subsidiaries in Bermuda alone. It’s unclear how much of its $53 billion in offshore profits are being stored (for tax purposes) in this tiny island.

Hundreds of Billions in Tax Revenue at Stake

It’s impossible to know how much income tax would be paid, under current tax rates, upon repatriation by the 235 Fortune 500 companies that have disclosed holding profits overseas but have failed to disclose how much U.S. tax would be due if the profits were repatriated. But if these companies paid at the same 28 percent average tax rate as the 55 disclosing companies, the resulting one-time tax would total $363 billion for these 235 companies. Added to the $127 billion tax bill estimated by the 55 companies who did disclose, this means that taxing all the “permanently reinvested” foreign income of the 290 companies could result in almost $491 billion in added corporate tax revenue.

Even “Non-Disclosers” Slip Up Sometimes As noted above, General Electric does not disclose the US tax it would owe if its $108 billion offshore stash was repatriated. But in its 2009 annual report, GE noted that it had reclassified $2 billion of previously earned foreign profits as “permanently reinvested” offshore, and said that this change resulted “in an income tax benefit of $700 million.” Since $700 million is 35 percent of $2 billion, this is an admission that the expected foreign tax rate on this $2 billion of offshore cash was exactly zero, which in turn strongly suggests that GE’s “permanent reinvestment” plan for this $2 billion involved assigning it to one of its tax haven subsidiaries.

What Should Be Done?

Many of the large multinationals that fail to disclose whether their offshore profits are stored in tax havens are the same companies that have lobbied heavily for tax breaks on their offshore cash. These companies propose either to enact a temporary “tax holiday” for repatriation, under which companies bringing offshore profits back to the U.S. would pay a very low tax rate on the repatriated income, or a permanent exemption for offshore income in the form of a “territorial” tax system. Either of these proposals would leave in place, or even increase, the incentive for multinationals to shift their U.S. profits, on paper, into tax havens.

A far more sensible solution would be to simply end “deferral,” repealing the rule that indefinitely exempts offshore profits from U.S. income tax until these profits are repatriated. Ending deferral would mean that all profits of U.S. corporations, whether they are generated in the U.S. or abroad, would be taxed by the United States. Of course, American corporations would continue to receive a “foreign tax credit” against any taxes they pay to foreign governments, to ensure that these profits are not double-taxed. 

Conclusion

Long before the recent Congressional hearings on Apple’s tax avoidance, it was clear to many observers that U.S. multinational corporations are systematically sheltering income overseas. The limited disclosures made by Apple and a handful of other Fortune 500 corporations show that these companies have moved profits into tax havens—and that some of these companies have managed to avoid virtually all taxes on these profits. But the scope of this tax avoidance is likely much larger, since the vast majority of Fortune 500 companies with offshore cash refuse to disclose how much tax they would pay on repatriating their offshore profits.

Despite lobbying by large multinationals that refuse to disclose whether their offshore profits are in tax havens, lawmakers should resist calls for tax changes, such as repatriation holidays or a territorial tax system, that would keep in place the incentives encouraging U.S. companies to send their profits to tax havens. If the Securities and Exchange Commission required more complete disclosure about multinationals’ offshore profits, it would become obvious that Congress should end deferral, thereby eliminating the incentive for multinationals to shift their profits offshore once and for all.

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[1]  Publicly held corporations with permanently reinvested foreign earnings are obligated to either disclose the tax they would pay upon repatriation or state that they are unable to calculate this tax liability. Most corporations choose the latter option. Apple is one of 55 companies identified in this report that choose to estimate their potential tax liability.

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May 31, 2013 12:57 PM | Permalink |

This presentation was given to the United Church of Christ, Office of Justice & Witness, and the Presbyterian Church (USA), Office of Public Witness.

Read the presentation.

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May 20, 2013 11:53 AM | Permalink |

Read this Report in PDF.

Virtually None of Its $102 Billion Offshore Stash Has Been Taxed By Any Government

An analysis of Apple Inc.’s financial reports makes clear that Apple has paid almost no income taxes to any country on its $102 billion in offshore cash holdings. That means that this cash hoard reflects profits that were shifted, on paper, out of countries where the profits were actually earned into foreign tax havens.

How We Know Apple’s Offshore Cash is Largely in Tax Havens

Under current law, corporations can indefinitely defer paying U.S. income taxes on their offshoreprofits. Multinational corporations with offshore profits sometimes disclose in their financial reports the amount of tax they would pay if there were no “deferral” and their offshore profits were taxable in the United States. But this potential tax rarely amounts to the full 35 percent U.S. corporate tax rate, since these companies typically have already paid some foreign income taxes on these foreign profits when they were earned. Companies are allowed a “foreign tax credit” against their U.S. tax when and if the profits are subject to U.S. tax. So a company that has already paid (for example) a 25 percent tax rate on its unrepatriated offshore income would only pay the difference between that amount and the U.S. corporate tax rate of 35 percent (in this example, 10 percent) when that income is repatriated to the U.S.  

The data in Apple’s latest annual report show that the company would pay almost the full 35 percent U.S. tax rate on its offshore income if repatriated. That means that virtually no tax has been paid on those profits to any government.

At the end of March 2013, Apple’s foreign subsidiaries had accumulated $102.3 billion in cash, cash equivalents and marketable securities. Based on more complete information provided in Apple’s latest full annual report, without “deferral” Apple would owe $35 billion in U.S. income taxes on this cash hoard.

Here is what we know from Apple’s 2012 annual report:

• At the end of fiscal year 2012, Apple had $82.6 billion in cash and cash equivalents parked offshore.

• Of this $82.6 billion, $40.4 billion was “permanently reinvested” foreign income that the company declared it had no plans to ever allow the United States to tax. Without “deferral,” however, Apple said that it would owe a U.S. tax bill of $13.8 billion on this $40.4 billion stash. That works out to a 34.2 percent U.S. tax rate

• The remainder of Apple’s offshore cash at the end of its last fiscal year was $42.2 billion. Apple did not treat this amount as “permanently reinvested” offshore. Therefore, it reported a potential future U.S. tax liability of $14.7 billion, which means a 34.9 percent U.S. tax rate.

• So all together, without deferral, Apple would have paid $28.5 billion in U.S. taxes on its $82.6 billion in offshore cash. This means the company’s U.S. tax rate would have been 34.5 percent, barely under the maximum U.S. corporate tax rate.

Applying this same U.S. tax rate to Apple’s $102.3 billion offshore cash hoard as of March 2013 would generate $35.3 billion in U.S. income taxes, without deferral.

Much of Apple’s Offshore Cash Hoard Likely Reflects Profits Shifted from the U.S.

In recent interviews, Apple CEO Tim Cook has denied that any of its cash in tax-haven subsidiaries has been shifted from the U.S., stating that “Apple does not funnel its domestic profits overseas. We don’t do that.”

While it’s virtually impossible to know precisely the source of Apple’s offshore cash, it seems very likely that much, if not most, of it stems from profits that were actually earned in the United States but shifted into tax havens. After all, the primary source of Apple’s profits is the research and design work that it does in the U.S.

But if a larger than expected amount of Apple’s offshore cash was generated by profits shifted into tax havens from foreign countries where Apple does real business, then that provides further proof that the “territorial” tax system used by countries such as the United Kingdom, Germany and so forth make offshore profit-shifting even easier to do than the United States’ “deferral” system.

A “Territorial” Tax System or “Repatriation Holiday” Would Increase Incentives for Apple to Shift Profits to Offshore Tax Havens

If Congress simply repealed the rule allowing U.S. corporations to defer U.S. taxes on their offshore profits, there would be no incentive for a company like Apple to claim that its profits are earned in offshore tax havens. The profits would be subject to the U.S. corporate tax no matter where they are generated.

But many multinational corporations are pushing Congress to move in the opposite direction and exempt offshore corporate profits from U.S. taxes. Some companies are lobbying for a permanent exemption, which is essentially what a “territorial” tax system provides. Others are lobbying for a temporary exemption, which proponents call a “repatriation holiday.”

A “repatriation holiday” is a tax amnesty for offshore corporate profits. Most variations of this type of proposal would allow U.S. corporations to bring their offshore profits back to the U.S. and pay no U.S. corporate taxes on those profits, or pay U.S. corporate taxes at an extremely low rate.

A similar repatriation amnesty was enacted in 2004 and is widely considered to have been a failure. A CTJ fact sheet explains why proposals for a second repatriation amnesty should be rejected:[i]

• Another temporary tax amnesty for repatriated offshore corporate profits would increase incentives for job offshoring and offshore profit shifting… One reason why the Joint Committee on Taxation concluded that a repeat of the 2004 “repatriation holiday” would cost $79 billion over ten years is the likelihood that many U.S. corporations would respond by shifting even more investments offshore in the belief that Congress will call off most of the U.S. taxes on those profits again in the future by enacting more “holidays.” 

• The Congressional Research Service concluded that the offshore profits repatriated under the 2004 tax amnesty went to corporate shareholders and not towards job creation. In fact, many of the companies that benefited the most actually reduced their U.S. workforces.

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[i] Citizens for Tax Justice, “Why Congress Should Reject A “Territorial” System and a “Repatriation” Amnesty: Both Proposals Would Remove Taxes on Corporations’ Offshore Profits,” October 19, 2011. https://ctj.sfo2.digitaloceanspaces.com/pdf/corporateinternationalfactsheet.pdf

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