With the prospect for slow action on corporate taxes and repatriation basically off the table, companies put money to work elsewhere.
While Congress and US companies continue to discuss, lament, and commiserate over uncompetitively high US corporate tax rates, those same companies may be taking action by putting their overseas cash to work elsewhere, namely overseas.
Just last week, four CFOs from major MNCs told the US House Ways and Means Committee that Congress should not repeat 2004’s tax holiday for US – aka, HIA 2.0. Instead, the CFOs want a broader, more comprehensive tax reform effort – an effort they feel will be derailed by a tax holiday, according to one CFO, United Technologies Corp.’s Gregory J. Hayes. Mr. Hayes said the current corporate tax regime “hinders success,” and was “designed when the US was the dominant economy, and before globalization became an unmistakable market reality.”
But whether a new HIA 2.0 will happen or a comprehensive tax gets implemented, companies aren’t waiting around, according to a report in the Financial Times. The FT said US MNCs have been “stepping up efforts to deploy their overseas earnings in cross-border mergers and acquisitions as they seek to avoid the tax hit from repatriating” their trapped cash. This has also prompted debate among bankers over whether tax issues are distorting business decisions, “potentially leading US companies to favor overseas investments over opportunities at home.”
This has been a worry for many US economists and others, who argue that the longer the US dithers on corporate taxes, the more likely it is companies will just decide to keep the money overseas. That’s the conclusion of Margo Thorning, SVP and chief economist at the American Council for Capital Formation (ACCF), who thinks the US will take forever to take on corporate taxes because there are too many roadblocks. With stimulus and other recovery expenditures to pay for, Congress “doesn’t have the political will to get it done. There are still lots of debates.” (See related story here.)
And of course, those earnings currently provide little or no tax revenue to the US Treasury. And up until recently it was kept mostly in cash, but now that is changing, the FT said, citing last week’s Microsoft purchase of Luxembourg-based Skype using $8.5bn in offshore cash.
What many companies are looking for is the US to switch to a territorial tax system and repealing the corporate tax on foreign earnings altogether. In a territorial tax regime, profits are only taxed by the country where the income is earned. But again, it’s a long way off if it ever happens, ACCF’s Thorning said. Also on the table, a value-added tax, or VAT. According to the Wall Street Journal, there’s a “surprising amount of interest in that idea on all sides,” including Democrats who see a VAT as a way to pay for new infrastructure and shore up spending programs and a few Republicans and corporate executives “who see it as a way to pay for tax cuts that would spur investment, and make U.S. businesses more competitive.”
Either way, action needs to taken soon or that trapped cash will end up funding infrastructure projects and spending projects elsewhere.