Rob Cox at the Breaking Views column at the NYT believes its time for another tax amnesty allowing US companies to repatriate cash held abroad. US companies don’t owe the corporate tax on foreign profits until they reaptriate the cash to US shores and so with the high corporate rate of 35%, they leave the cash abroad as long as possible. When this was last done in in 2004, Congress allowed them to bring cash home and pay a reduced tax rate of 5%. $362 billion came home that time and the companies paid a bit over $18 billion in taxes on that money.
As Cox points out, it is hard to estimate how much would come back if we did it again, but corporate profits were at an all time high over the last few years, so the sum is probably considerable. Why don’t we make this permanent? The UK recently took that action. Many other countries have territorial taxation such that companies only pay taxes in the country where the profit is made. A Dutch company only pays Dutch taxes on income earned in Holland, while foreign profits are taxed in the country where they are made. US companies face worldwide taxation; they pay US corporate tax on all profits. Current law allows them to defer the tax until the profits are repatriated but ultimately they pay the tax unless Congress allows an amnesty such as the one in 2004. The tax burden is lessened somewhat by the foreign tax credit which allows the US company to deduct the tax paid in the foreign jurisdiction.
US companies’ competitiveness is reduced because of the way we tax foreign profits. While an amnesty is a good idea, why not just switch to territorial taxation and make it permanent? We can either do that or reduce the corporate tax rate, which if reduced enough would be essentially the same thing if the foreign tax credit is retained, but something needs to be done to make US companies more competitive in the world market.
Under the current system, US multi-nationals have an incentive to locate plants overseas and pay the lower tax rate of a country like Ireland where the corporate tax is just 12.5%. If the company leaves the profits outside the US they don’t have to pay the US corporate tax. If we switched to territorial taxation, the incentive to locate plants overseas would be reduced.