Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Let's Bring Corporate America's Cash Home

David Hryck

This is a guest post from David Hryck. Hryck is a partner at DLA Piper ( US ) LLP

On May 11, a bipartisan group of six Congressman proposed new legislation establishing a repatriation tax holiday modeled after a similar provision enacted as part of the American Jobs Creation Act of 2004 (the “2004 Tax Holiday”).

Deborah Harrison | Getty Images

The reduced 5.25 percent tax rate on repatriated offshore earnings is designed to entice multinational corporations to bring cash back to U.S. shores for the purpose of job creation and other U.S. investment.

In response to enhanced lobbying efforts on behalf of U.S. based multinational companies, several congressional democrats have recently shown support for some version of this proposed legislation.

Opponents of the tax holiday, however, argue that the 2004 Tax Holiday was largely unsuccessful in its stated intent, and that the true impact of the 2004 Tax Holiday was to “line the pockets” of corporate shareholders.  In fact, opponents argue, the largest beneficiaries of the 2004 Tax Holiday were U.S. firms who were aggressively shifting income offshore.  Enacting a second tax holiday will only provide further incentive for offshore income deferral, yielding the opposite result from the job creation and U.S. investment the legislation is intended to generate.

The fact is that recent changes to tax rules on foreign investment in U.S. property has made it increasingly difficult for U.S. based multinationals to bring cash onshore in a tax efficient manner.  The result is that U.S. based multinationals are better off, on an after tax basis, investing offshore, than bringing profits back to the U.S. for job creation and other U.S. investment.

Case in point:  Microsoft recently announced its acquisition of Skype SRL for a price tag of 8.5 billion in which Microsoft used offshore cash.  Some have suggested that Microsoft was willing to overpay for Skype because of the reduced tax costs of the offshore investment!  If the proposed legislation counteracts the tax bias against repatriation, it would seem like a step in the right direction.

Proponents of the new legislation point out that the 2004 Tax Holiday has been modified to further ensure U.S. job creation.  Text of the legislative proposal contains a penalty imposed on a U.S. corporation that takes advantage of favorable repatriation rates, and then sheds U.S. jobs.

Opponents of the new tax holiday should take this penalty provision into consideration before prejudicially damning the entire legislative proposal.

The evidence is clear that corporations are incentivized to retain cash offshore.  The proposed tax holiday is designed to combat that incentive in a more targeted manner than the 2004 Tax Holiday.  The alternative however, is continued investment of cash offshore. Thus, incentivizing U.S. multinationals to bring cash onshore, no matter how spent, would seem to me to benefit in the some way an economy badly in need of  a natural infusion. Why wouldn’t we allow this to happen?


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