UPDATE 1-Fitch slams proposed U.S. foreign profit tax break

Thu Oct 6, 2011 4:24pm EDT

* Rating agency says investment boost unlikely to result

* Senators Hagan, McCain introduce dual-track legislation

* Proposal likely to factor in deficit, tax reform debate (Recasts with reaction to the bill, adds comments by Obama administration, adds other background)

By Kevin Drawbaugh

WASHINGTON, Oct 6 (Reuters) - Giving U.S. corporations a tax break on their overseas profits likely would not boost the economy or jobs, said credit rating agency Fitch Inc on Thursday after two senators unveiled a tax "holiday" bill.

The Fitch statement echoed two other studies released on Tuesday that reached the same conclusion -- a stark contrast with the picture painted by Republican Senator John McCain of the legislation he introduced with Democrat Kay Hagan.

The lawmakers appeared at a news conference to discuss their measure, which offers two possible reduced tax rates for repatriating, or bringing into the United States, earnings now stashed abroad avoiding the 35 percent corporate income tax.

Under the bipartisan Hagan-McCain bill, multinationals could repatriate foreign profits at an 8.75 percent tax rate or, if they boost hiring, at 5.25 percent. Corporations are sitting on an estimated $1.5 trillion in overseas profits. (For a Reuters Insider interview with Hagan: r.reuters.com/qem34s)

McCain said his bill would be offered as an amendment to President Barack Obama's jobs package when that measure arrives in the Senate, if the Democratic Senate leadership does not explicitly include the tax provision in the jobs package.

The Obama administration reiterated its refusal to consider a foreign profit tax break on its own.

Citing past statements on the issue by U.S. Treasury Secretary Timothy Geithner, a Treasury spokeswoman on Wednesday said, "We won't consider tax relief for repatriated earnings outside the context of broader corporate tax reform."

The Hagan-McCain bill is seen as having little chance of passage as a stand-alone item, but it could be an important bargaining chip as lawmakers and the administration grapple with deficit reduction, tax reform and job creation.

Though small and mid-sized firms have little stake in the matter, big multinationals keenly desire the overseas income tax break. It could be a valuable carrot for Democrats to dangle in seeking support for closing tax loopholes that would raise new revenues and clean up the tax code, analysts said.

FITCH WEIGHS IN

Corporate lobbyists trying to spin the tax break as a form of stimulus took another blow from Fitch on Thursday, however.

"Proposed legislation to provide a temporary tax holiday for U.S. firms repatriating foreign earnings is unlikely, if passed, to support growth-oriented investment by U.S. firms," said Fitch, a top global credit rater, in a statement.

"Fitch expects most firms benefiting from the proposed repatriation tax relief, notably large multinational companies in the technology and pharmaceutical sectors, to prioritize share repurchases at a time when cash balances are strong and capital spending plans are increasingly uncertain," it said.

Multinationals have been pushing for months for the tax break, hoping to replay a similar Bush administration holiday.

In 2004-2005, in the first overseas corporate profit repatriation tax holiday, 843 corporations brought home $362 billion in overseas income at a 5.25 percent tax rate. Without the holiday, they would have had to pay 35 percent in tax.

As they are doing now, proponents of the tax break six years ago represented it as a boost to jobs and the economy, but numerous studies have raised doubts about this.

Reports released on Tuesday by two think tanks said the 2004-2005 tax break did little or nothing to boost the economy or create jobs, despite promises that it would, and said that another such tax break would likely have the same outcome, going to bonuses and dividends rather than new investments.

Spanning the ideological spectrum, one of the studies this week came from the left-leaning Institute for Policy Studies; the other from the conservative Heritage Foundation.

The Joint Committee on Taxation, a nonpartisan research arm of Congress, has estimated that another tax holiday like the one in 2004-2005 would boost government revenues at first, but eventually cost taxpayers about $78.7 billion over 10 years.

PENALTY FOR JOB CUTS

Hagan-McCain would slap a penalty on corporations that repatriate profits from overseas and then cut payrolls. The penalty would be $75,000 per full-time position eliminated.

The 2004-2005 tax break had similar sanctions, but studies have shown that companies found ways to get around them.

Calling the bill "a critical step forward in the effort to jump-start our economic recovery," WIN America campaign director Karen Olick said it would cause "upwards of $1 trillion" to be brought into the country by businesses.

WIN America is a coalition of companies -- including high-tech giants Apple Inc (AAPL.O), Cisco Systems Inc (CSCO.O), Oracle Corp ORCL.O and Microsoft Corp (MSFT.O) -- that is lobbying Congress for the income tax break.

Similar legislation has already been introduced in the U.S. House of Representatives by Kevin Brady, a House Republican.

McCain, a former presidential candidate who seldom takes a lead role in business and economic legislation, said his bill would pump between $50 billion and $80 billion of tax revenue into the U.S. Treasury and create 2 million jobs.

To get the extra-low tax rate of 5.25 percent, under the bill, companies would have to increase "qualified payroll" by 10 percent or more. Qualified payroll means all wages paid to employees that are subject to payroll tax, the senators said. (Additional reporting by Rachelle Younglai, editing by Matthew Lewis)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (2)
BradReeseCom wrote:
Hi Kevin,

Recommend that Senators Hagan and McCain read the following shocking expose on the push for a “foreign profits tax holiday” by Cisco Systems and its CEO John Chambers:

http://www.bloomberg.com/news/2011-06-28/biggest-tax-avoiders-win-most-gaming-1-trillion-u-s-tax-break.html

Revealingly, it was Cisco’s Fiscal Year 2005 Annual Report that specifically detailed its last “foreign earned profits tax holiday” where Cisco repatriated to the U.S. its accumulated income earned abroad:

“On October 22, 2004, the American Jobs Creation Act of 2004 (the ‘Jobs Creation Act’) was signed into law. The Jobs Creation Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations.

“In the first quarter of fiscal 2006, we distributed cash from our foreign subsidiaries and will report an extraordinary dividend (as defined in the Jobs Creation Act) of $1.2 billion.”

So how many new U.S. jobs did Cisco create in Fiscal Year 2006 with all that cash it received from its foreign subsidiaries, especially since according to Cisco CEO John Chambers, Cisco is committed to the U.S. economy and to the American worker?

Well, according to Cisco’s Fiscal Year 2006 Form 10-K (page 10):

A whopping 75% of Cisco’s new job creations were in locations outside the United States!

http://www.bradreese.com/blog/12-23-2010.htm

Sincerely,

Brad Reese

Oct 06, 2011 5:45pm EDT  --  Report as abuse
LacyMacAuley wrote:
Corporate tax holidays lead to layoffs and downsizing, not job creation, says a recent report by the Institute for Policy Studies. (This fact was confirmed by a recent paper by the conservative think tank, Heritage Foundation. When the right and left agree on something, it might just be true!)

Here’s a link to the report: http://www.ips-dc.org/reports/corporations_that_take_tax_holidays_slash_jobs

The report shows that the last time there was a corporate tax holiday (in 2004), corporations pocketed the money or gave bonuses to their CEOs or shareholders, then laid off workers or downsized. This report is another way of saying: Giving tax breaks to corporations doesn’t magically create jobs, and is bad policy.

No tax breaks for the job destroyers!

Oct 07, 2011 3:41pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.