US Treasury Rejects Corporate Tax Holiday

by Mike Godfrey, Tax-News.com, Washington

28 March 2011

Michael Mundaca, the Assistant Treasury Secretary for Tax Policy, has attacked suggestions that a tax break could be considered for United States companies repatriating profits from their overseas operations, saying that it would only be possible in the context of broader corporate tax reform.

The latest call for such an incentive for US multinationals to bring back the estimated USD1.2 trillion in profits they hold overseas, and, hopefully, re-invest in their US operations, came recently from Eric Cantor, the House of Representatives’ Republican Majority Leader, who proposed the idea as a short-term measure to boost the economy while corporate tax reform was being debated.

In addition, earlier this month, Brian Bilbray, a member of the House Republican Policy Committee, introduced the Job Creation and Innovation Investment Act of 2011, under which a zero tax rate would be established for funds brought back to the US that are, subsequently, invested in research and development, new manufacturing and facility expansion. Companies bringing back profits for use at their own discretion would be subject to a 5.25% tax rate.

That was known already to be at odds with President Obama’s thinking, and Mundaca has now also reiterated the government’s opposition, writing in a blog that, while “comprehensive, long-term reform has the potential to benefit businesses across the US, and make our economy more competitive... a narrow group of businesses has suggested that instead, our primary focus should be a temporary repatriation tax holiday – an idea tried a few years ago that gave a select group of US multinational corporations a temporary, substantial tax break on their overseas profits.”

He added that: “Letting our eye off the ball of comprehensive tax reform in favor of a temporary measure of this kind would be a mistake. In 2004, when the US enacted a repatriation tax holiday, the goal was to encourage US multinationals to pay bigger cash dividends from their overseas subsidiaries and use the cash to make investments in the US. Unfortunately, there is no evidence that it increased US investment or jobs, and it cost taxpayers billions.”

He also pointed out that, in 2009, when the idea was again being mooted, it was indicated that the cost of a new tax holiday had increased to USD30bn. “Moreover,” he said, “according to outside estimates, just five firms got over one-quarter of the tax benefits of the repatriation holiday, and just 15 firms got more than 50% of the benefits. To pay for giving this large tax cut once again to a small group of US companies without increasing the deficit, we would have to raise taxes on other US businesses.”

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