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162 IRET Congressional Advisory 1 (2003)

handle is hein.taxfoundation/iretcgadv0159 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. October 31, 2003 Advisory No. 162 LET COMPANIES REPATRIATE THEIR FOREIGN INCOME Current tax law impedes the repatriation of foreign earnings of U.S. multinational corporations. Firms are reluctant to bring home profits in excess of amounts protected by foreign tax credits. Those credits are getting scarcer, because, over time, foreign countries have reduced their corporate tax rates. The United States now has the second highest corporate tax rate in the 30 member Organization for Economic Cooperation and Development (OECD). The result is that repatriated profits face higher add-on U.S. taxes if the income is brought home. It is poor economic and tax policy The Senate to put up tax barriers to the temporarily free flow of capital and to national corpo discourage investment in the foreign proft, United States. fi rate of 5.25 On October 1, the Senate JPMorgan St Finance Committee reported that abot out a bill (S. 1637) to repeal 'trapped foi the Extraterritorial Income profits might deduction (ETI) that was ruled increasing in illegal by the World Trade the United Sta Organization (WTO). On by half a perce October 29, the House Ways and Means Committee approved its own version (H.R. 2896). (ETI replaced the old Foreign Sales Corporation (FSC) export subsidy that also ran afoul of the WTO.) Both bills use the revenue from repealing the deduction to reduce business taxes. The Senate ETI bill includes a variant of the Homeland Investment Act which would temporarily allow U.S. multinational corporations to repatriate foreign profits at a reduced tax rate of 5.25% on dividends paid by a foreign subsidiary to ETI il1low Iratio (iat ~curIit $3060 reign be ?stme 'es anI ?nltag its U.S. parent. The Ways and Means Committee considered a similar provision with a 7% tax rate, but dropped it to trim costs. These special tax rates may seem low compared to the U.S. corporate tax rate of 35%, but most foreign source corporate income is subject to foreign income taxes. The foreign tax credit reduces the residual U.S. tax to low single digits (about 3.7% in 1999 according to IRS data). Some companies, however, have exhausted their foreign tax credits, or cannot bill ..od access them due to various U.S. multi- restrictions on their use, and reptoatriate leave substantial earnings Is t abroad to avoid the full U.S. A red d tx tax. Luring that income home, A teven at a reduced tax rate, ies concludes would raise revenue. A study billion of by JPMorgan Securities source past concludes that about $300 repatriated . billion of trapped foreign ntspending in source past profits might be d raising GDP repatriated under the Homeland epoint. provision, increasing investment spending in the United States and raising GDP by half a percentage point. That is over $50 billion dollars a year in added U.S. output and income, on which the federal tax take would run about $10 to $12 billion a year. That tax feedback may seem like a small number, but it annually dwarfs the projected JCT ten year revenue loss. Alternatively, it is over 25% of the projected annual federal subsidy of the proposed prescription drug benefits under Medicare. These benefits are well worth going after. I ** S I 68 3 ~ ~63 Se i

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