In a blog post, an assistant US Treasury secretary makes the case for not giving another tax holiday to US MNCs.
As widely expected, the Obama Administration is not going to reduce taxes to allow companies to bring cash home. This will have special significance to cash-rich technology, pharma and other US multinational companies, many of which have more than half their cash stuck overseas.
In a blog post on the US Treasury Web site, Michael Mundaca, the assistant treasury Secretary for tax policy, echoing comments from President Obama State of the Union address, argued that the previous tax holiday only benefited a few at the expense of the many. “According to outside estimates, just five firms got over one-quarter of the tax benefits of the repatriation holiday, and just 15 firms got more than 50 percent of the benefits,” Secretary Mundaca blogged. “To pay for giving this large tax cut once again to a small group of US companies without increasing the deficit, we would have to raise taxes on other US businesses.”
Instead Secretary Mundaca said the US should focus on comprehensive corporate tax reform. Earlier in March, Fed Chairman Ben Bernanke weighed in the issue (see related story here), allowing that another holiday would help the economy much as the 2004 break did. However he also felt a better solution would be to just lower corporate taxes altogether.
Currently the US has the second highest corporate tax rate, at 35 percent (or more for some companies), just behind Japan, which has a staggering 39 percent. Nonetheless, some US corporations, due to various breaks, pay far less than 35 percent (see related story here).
HIA 2.0
The idea of allowing US MNCs to repatriate cash at a lower rate as they were allowed to do as part of the 2004 American Jobs Creation Act, has been circulating for at least two years or more. Like 2004, a tax holiday – or HIA 2.0 – would cut to 5.25 percent from 35 percent the tax rate US MNCs pay on their foreign earnings. Some argue, as did Cisco CEO John Chambers in a Wall Street Journal op-ed piece in October 2010, that it would be cheap stimulus. “By permitting companies to repatriate foreign earnings at a low tax rate — say, 5 percent — Congress and the president could create a privately funded stimulus of up to a trillion dollars,” he and Oracle’s Safra Catz wrote. “They could also raise up to $50 billion in federal tax revenue. That’s money the economy would not otherwise receive.”
Proponents of another tax holiday estimate that up to $1tn in cash is trapped offshore. And many also predict between $400bn and $700bn could be repatriated. Based on these estimates, using the 5.25 percent figure, repatriation could give the US government between $20bn-$36bn in tax revenue.
Republican support
And on Monday of this week, Republican House Majority Leader Eric Cantor in speech at Stanford University said US MNCs should be allowed to repatriate overseas profits at a reduced tax rate along with the planned work on more comprehensive tax reform. Rep Cantor said that a tax holiday should be part of a plan to create jobs and increase the competitiveness of American companies.
But Secretary Mundaca repudiated the argument that repatriation creates jobs. Citing a study from the nonpartisan Congressional Research Service, Secretary Mundaca said that “most of the largest beneficiaries of the holiday actually cut jobs in 2005-06 – despite overall economy-wide job growth in those years – and many used the repatriated funds simply to repurchase stock or pay dividends.”
While it’s good news that corporate tax reform remains high on the priority list for the Obama Administration, it’s still a disappointment for cash-rich US multinational companies. Treasurers, then, will have to figure out other ways to bring the cash home, if they decide to at all.