tax notes international - Tuck School of Business - Dartmouth College

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Figure 2. Annual Flow of Tax-Advantaged Foreign Earnings of 40 U.S. Multinationals, 2003-2007 Billions $140 $120 $100 $80 $60 $40 $20 $0 $60.1 $67.6 For this group of 40, the accumulated stock of unrepatriated foreign earnings hit a temporary low in 2005 of $300.3 billion. Under the Jobs Act provisions, these companies repatriated a total of $184.8 billion of foreign earnings — about 90 percent in that year. By the end of fiscal 2007 these multinationals had replenished their stash of unrepatriated earnings to $518 billion — a 72 percent increase in two years. These totals are shown in a solid line in Figure 1. Company-bycompany figures are presented in the table at the end of the article. Another view is provided in Figure 2. It shows growth in the stock of unrepatriated foreign earnings plus earnings repatriated under the Jobs Act. In other words, it shows the annual change in accumulated foreign earnings that would have occurred each year without the Jobs Act. This is a measure of how much profit multinationals are keeping offshore to maximize tax advantages. From 2003 to 2007 the annual increase approximately doubled — from $60 billion to $122 billion. The two figures show multinationals are loading up on unrepatriated earnings at a far greater rate than before the tax holiday legislated in 2004. This is a result of higher worldwide profitability since the prior recession and an increasingly larger share of business activity taking place abroad. But as documented previously in these pages, it is also a result of greater profit shifting by multinationals out of the United States and into $95.0 $96.4 $122.1 2003 2004 2005 Fiscal Years 2006 2007 Source: Dotted line in Figure 1. foreign jurisdictions. (For that discussion, see Tax Notes Int’l, Mar. 17, 2008, p. 910, Doc 2008-4725, or2008 WTD 49-5.) What’s Next? HIGHLIGHTS These data suggest that the pressure for another repatriation holiday may be greater than ever. Despite this, it looks like the growing opposition could thwart any repeat. First of all, there is widespread skepticism that these repatriations work as advertised. For most lawmakers, the debate about the need for a repeat of the ‘‘onetime’’ tax relief for repatriated dividends centers on the economy and job creation. Did those lucky multinationals increase jobs as they told Congress they would and as they outlined in their legally required dividend repatriation investment plans? The evidence is in, and the answer clearly is no. (Dharmapala, Foley, and Forbes, ‘‘The Unintended Consequences of the Homeland Investment Act: Implications for Financial Constraints, Governance, and International Tax Policy,’’ 2008.) Besides job creation, there is the additional issue of how temporary repatriation relief affects the web of global tax checks and balances. Repeated ‘‘one-time’’ relief would send a signal to multinationals that they no longer need to consider profits shifted offshore as trapped. This increases the benefit of aggressive transfer pricing practices that would otherwise be held in TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 377 (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
HIGHLIGHTS check by full tax on any unlocking of offshore cash. And this in turn reduces U.S. tax revenue as well as provides an added incentive for multinationals to locate facilities abroad. President Barack Obama campaigned on reducing the incentives for offshore job creation that U.S. tax law provides by deferring tax on unrepatriated foreign earnings. Temporary repatriation relief is a pro-deferral provision. In early 2008, Senate Finance Committee member John Ensign, R-Nev., tried to include an amendment that would provide another round of foreign dividend relief in the Finance Committee markup of the first stimulus bill. His efforts failed then, and any repeated effort would likely run into even tougher opposition. And according to a January report by Ryan J. Donmoyer of Bloomberg News, there is little support in the House for another round of repatriation relief. Business lobbyists know all this, so now there is talk of a substitute for section 965 for multinationals whose foreign earnings are available in cash. Some policy- makers see expansion of section 956, which treats a controlled foreign corporation’s investment in U.S. property as gross income to its U.S. shareholder, as an acceptable alternative to a revival of section 965. As also reported in the Donmoyer article, Morgan Stanley, United Technologies, General Electric, and unnamed other multinationals are promoting a plan to Congress that would waive U.S. tax under subpart F on businesses that borrow from their offshore units. This would be a statutory expansion of the section 956 relief the Treasury provided in October to the general rule that loans from foreign subsidiaries should be treated as gross income. In Notice 2008-91, 2008-43 IRB 1001, Doc 2008-22166, 2008 WTD 202-27, the IRS lengthened the permissible period of short-term loans from CFCs. ♦ Lee A. Sheppard is a contributing editor to Tax Analysts. E-mail: lees@tax.org Martin A. Sullivan is a contributing editor to Tax Analysts. E-mail: martysullivan@comcast.net 378 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
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tax notes international - Tuck School of Business - Dartmouth College

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