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Earnings Repatriation: Implications for Tax Policy

April 22, 2015
In an increasingly globalized economy, borders no longer confine corporations. Multinational corporations have become numerous and proliferate the international economy. Tax policy influences company behavior, and the differing nature of many different countries particularly influences multinational corporations. This is Wonk Tank’s look at the implications of cross-border corporate tax policy.



Percentage of Federal Revenue From Corporate Taxes(Image: Corporate Tax Revenue as a Percentage of All Federal Revenue. Source: Data compiled by Shane Murphy from White House Office of Management and Budget, Historical Tables, Table 2.2)

The wide variation in countries’ corporate tax rates creates a complicated situation for U.S.-based multinational corporations. Profits earned outside of the U.S. present them with a tough dilemma: should multinationals bring their foreign profit home and face the U.S. tax rate at nearly 35 percent, or should they keep these profits overseas and take advantage of a lower tax burden?

The former is called earnings repatriation, and the latter is called deferral. A U.S.-based multinational corporation is only taxed on foreign earnings when those earnings are brought back to the U.S. Since this profit is already taxed in the foreign countries where it is earned, multinationals often choose to defer foreign earnings overseas, usually reinvesting in foreign subsidiaries instead of repatriation. According to a Bloomberg News report, U.S. companies have $2.1 trillion in foreign earnings overseas. For these multinationals corporations, deferral has become a key tactic to skirt an unnecessary tax bill. For instance, American companies such as Apple and Microsoft both have over $20 billion overseas. Keeping foreign earnings abroad undoubtedly saves these companies money, but it also benefits countries with lower corporate tax rates at the expense of U.S. taxpayers. 

In a 2013 interview with the Washington Post, Apple CEO Tim Cook bluntly expressed his reasoning behind deferral of Apple’s foreign earnings: “If you look at it today, to repatriate cash to the U.S, you need to pay 35 percent of that cash, and that is a very high number,” he said. “We are not proposing that it be zero. I know many of our peers believe that. But I don’t view that. But I think it has to be reasonable.”

(Image: Cash kept overseas by Apple and its peersSource: KQED)

 

The view that our corporate tax structure is unfit for the global economy shares bipartisan acceptance in Washington. Yet, disagreement exists on how to approach the problem. 

President Obama’s proposed 2016 budget offered two solutions: implement a one-time 14% tax on overseas earnings brought back home, as well as put into effect a 19% minimum tax on all future repatriated earnings. Republicans, on the other hand, want a lower tax burden for U.S.-based multinational in order to incentive the repatriation of foreign earnings and discourage deferral. Former House Ways and Means Committee Chair Dave Camp proposed a one-time tax of 8.75% on earnings brought home from overseas.

Regardless, the American political climate makes the prospect of any meaningful corporate tax reform unlikely. However, as the U.S. economy improves, the vast sums of cash overseas could gradually begin to flow back to the U.S. without any major reform in corporate tax policy.   

2014 proved to be a better year for the U.S. in terms of repatriation. U.S.-based multinationals brought home an estimated $300 billion of their foreign earnings, which is the most since the U.S. offered a temporary corporate tax reduction on foreign earnings in 2005. For example, eBay brought home $9 billion in foreign earnings in 2014. While the move cost eBay around $3 billion in taxes, the company viewed repatriation as necessary to finance domestic endeavors, such as stock buybacks and acquisitions. VeriSign, Teleflax, and Stryker are all other U.S. multinational corporations that took a similar route in 2014.

This trend goes hand-in-hand with an improving U.S. economy. More repatriation indicates that companies see the benefit of domestic opportunities as outweighing the cost of a higher tax bill. While this isn’t a long-term solution to the continuing issue of deferral, a strong economic environment in the U.S. can help bring foreign earnings home.

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