Tax Quarry

On June 20, 2011, President Obama released a statement reaffirming the United States’ commitment to an “open investment policy”.   In the words of the President, this commitment is “a commitment to treat all investors in a fair and equitable manner under the law”.  President Obama continued to elaborate stating the following:

My administration is committed to ensuring that the United States continues to be the most attractive place for businesses to locate, invest, grow, and create jobs.  We encourage and support business investment from sources both at home and abroad.

According to Obama’s press release, in support of encouraging inbound investments to the US, he mentions that

“Investments by foreign-domiciled companies and investors create well-paid jobs, contribute to economic growth, boost productivity, and support American communities.  The United States consistently receives more foreign direct investment than any other country in the world.  By voting with their balance sheets, businesses from abroad have clearly stated that the United States is one of the best places in the world to invest.  This is because we have a strong and open economy, the world’s most productive workforce, a unique culture of innovation and entrepreneurship, remarkable colleges and universities, and a business environment marked by transparency, protection of intellectual property, and the rule of law.

What does this mean from a tax perspective?  Specifically, what does this mean in the context of a discussion about a proposal to reduce taxes on repatriation of profits for a discrete, specified period of time in order to stimulate cash flow and tax receipts in a struggling US economy?  Essentially, this proposal would give corporations, with significant profits accumulating outside of the US, a “repatriation holiday”.

In an article by David Kocieniewski from the New York Times, entitled, “Companies Push for Tax Break on Foreign Cash”, the author describes the way the current proposed repatriation holiday would work. 

According to Mr. Kocieniewski's description, where a US corporation has amassed a profit in a foreign jurisdiction, “the federal income tax owed on ... profits returned to the United States would fall to 5.25% for one year, from 35%”.  The idea, if perfectly executed in alignment with the proposal, would, “generate tens of billions in tax revenues as companies transfer money that would otherwise remain abroad, and it could ease the huge budget deficit”.    

However, critics, including Mr. Kocieniewski believe that perfect execution is unlikely and not possible without extensive monitoring.  Further, they question whether the long-term impact of such a policy would end up costing taxpayers more in lost revenue outweighing the short-term benefits to the Treasury. 

Mr. Kocieniewski lists Mr. Obama and his administration in the list of hardliners against the repatriation holiday proposal. 

But, in light of Mr. Obama’s acknowledgement of the increasing global competition that the US faces for jobs and industries; and the desire for the US to remain the destination of choice for investors around the world, would it make good business/political sense to cash in on the short term gains of a repatriation holiday?  

For a copy of the press release, click here.

June 20, 2011

By: Marsha Henry ©