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Senate Rejects Dividend Repatriation Deduction

by Mike Godfrey,, Washington

06 February 2009

The United States Senate has voted to reject an amendment to the American Recovery and Reinvestment Act that would have allowed a deduction for dividends received from controlled foreign corporations for an additional year.

As the Senate continued its deliberations on the recovery legislation on February 3, the amendment, introduced by California Democrat Barbara Boxer, and John Ensign, a Nevada Republican, was rejected by 55 votes to 43.

The Boxer/Ensign amendment would have repeated the one-year tax break granted by the American Jobs Creation Act of 2004 (AJCA), which attempted to encourage US corporations to repatriate foreign earnings by allowing them to deduct 85% of the qualifying dividends received from foreign corporations they controlled, effectively reducing the corporate tax rate on such earnings to 5.25%.

Foreign earnings are generally not taxed until they are repatriated, but can be taxed as high as the top corporate rate of 35% when paid as dividends to US corporations.

The idea is a contentious one however. While advocates of the move argue that it would provide a timely stimulus to the US economy by encouraging large US corporations to repatriate money which could be used for domestic investment and job creation, sceptics of the plan contend that the temporary rule would merely help US multinationals to avoid their fair share of tax, while creating no incentive for them to spend the repatriated money at home.

An analysis of Internal Revenue Service figures by Grant Thornton suggests that the ACJA tax break had mixed success. The repatriated USD312bn in qualified dividends in 2005 generated an estimated USD18bn in revenue for the Treasury – far exceeding the USD2.8bn in revenues predicted by the Joint Committee on Taxation. However, of the 10,000 or so US corporations which had CFCs in 2004, only 843 chose to take advantage of the tax break. There is also little evidence to suggest that the tax break increased domestic levels of investment.

While there is some support for reinstating the measure in Congress, the protectionist overtones of President Obama's economic policies suggest that the White House is not about to reward US multinationals for investing overseas. This is a view shared by Senators Carl Levin and Bryan Dorgan, two long-standing anti-offshore campaigners whose voice has strengthened along with the Democrat majority in both houses of Congress.

“There’s another phrase for repatriation – it’s called rewarding the outsourcing of jobs," commented Dorgan in a joint analysis of the proposal with Levin.

"If we allow US corporations to once again send the money they earn abroad back to the US at a discounted tax rate, it will only lead to more companies moving their profits offshore. The goal is to strengthen our economy with tax policies and investments that will create jobs here. That won’t happen with a tax policy that rewards the outsourcing of US jobs," he argued.

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