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Congress Looks At Repatriation Tax For Road Spending

by Mike Godfrey, Tax-News.com, New York

25 June 2015


On June 24, the US House of Representatives Ways and Means Subcommittee on Select Revenue Measures held a hearing on the taxation of repatriated foreign earnings as a potential funding mechanism for the Highway Trust Fund (HTF).

The HTF mainly depends on the federal fuel tax, otherwise known as the gas tax, which has remained unchanged since 1993 and which presently pays for only about a third of state and local spending on roads.

According to the Congressional Budget Office, there will be an HTF funding shortfall of USD92bn at present spending levels over the period 2015-2020, without accounting for increased spending on US infrastructure that many believe is urgently needed.

The impending expiry of short-term funding for the HTF, in place only until the end of July, has led to calls for more stable sources of funding to be found. With the politically difficult solution of hiking gas taxes still being ruled out by leading lawmakers, Subcommittee Chairman David Reichert (R – Washington) organized a further hearing to examine whether the matter could be solved by taxing the USD2 trillion in foreign income that US multinational companies have accumulated overseas.

With US corporate taxation being deferred on the earnings of foreign subsidiaries of US multinationals as long as the profits remain abroad, two types of repatriation tax proposals have been put forward.

On the one hand, companies could be encouraged to return their foreign earnings voluntarily to the US with low preferential tax rates of around 6-8 percent. Meanwhile President Barack Obama's proposal would impose a 14 percent one-time tax on all past corporate earnings accumulated abroad, which could then be repatriated subsequently without any further US tax, followed by an annual 19 percent minimum tax on multinationals' future foreign income.

In its testimony to the hearing, the Joint Committee on Taxation (JCT) cast doubt on the efficacy of the first proposal to fund the HTF over the long term. It estimated that a preferential tax rate for voluntarily repatriated foreign corporate earnings would have a negative fiscal impact – a USD117.9bn revenue loss – in the period 2015-2025.

It noted that, if corporations believe that further tax reductions will occur in the future and become a regular part of the tax system, it would create an incentive to retain more earnings overseas, rather than repatriating them, and to locate more income and investment abroad.

Jane Gravelle of the Congressional Research Service said "an issue with using [repatriation holidays to fund the HTF] is both that they are unlikely to yield sufficient (or even positive) revenue and they are transitory."

On the other hand, while the JCT has calculated that President Obama's plan would produce a USD217.2bn revenue gain in 2015-2025, many lawmakers, particularly Republicans, are wary of using new tax revenue for anything other than lowering rates as part of comprehensive tax reform.

Reichert pointed out that "repatriation cannot be done as a standalone; it must be part of a transition to a more competitive [US international tax] system."

In his testimony, Curtis Dubay, Research Fellow in Tax and Economic Policy at the Heritage Foundation, also concluded that, "if Congress changed repatriation policy as a stand-alone measure to cover a hole in the HTF, it would create less incentive to change the tax policy from a worldwide system to a territorial system. Instead, Congress should focus on establishing a territorial system and reserve changes to repatriation policy for aiding that sizable improvement to the tax code."

TAGS: tax | business | law | corporation tax | multinationals | United States | tax breaks | tax reform | construction | Tax

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