About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

1 1 (December 4, 2017)

handle is hein.crs/govcfvx0001 and id is 1 raw text is: FF.ri E.$~ & mppm qq\ p\w gn'a', ggmm I aS 11LIANJILiN, Updated December 4, 2017 Tax Reform: Repatriation of Foreign Earnings A 2016 report released by the U.S. Public Interest Research Group, Citizens for Tax Justice, and the Institute on Taxation and Economic Policy estimated that Fortune 500 companies held nearly $2.5 trillion in accumulated profits offshore for tax purposes. Taxing these offshore profits has been discussed as a means to pay for several policy goals including infrastructure investment and lowering corporate statutory rates. Br 'ie IF S- ., ,- ,,. ,a r,. , k' C u., re~m : La w The United States bases its jurisdiction to tax international income on residence. As a result, U.S.-chartered corporations are taxed on their worldwide income, but foreign corporations are taxed only on their U.S.-source income. Accordingly, a U.S. firm with overseas operations can indefinitely postpone paying its U.S. tax on its foreign income by operating through a foreign subsidiary. Using the same principle, U.S. taxes are deferred as long as the firm's foreign earnings remain in the control of its foreign subsidiary and are reinvested abroad. The U.S. firm pays taxes on its overseas earnings only when they are paid to the U.S. parent corporation as intra-firm dividends or other income. Another prominent feature of the U.S. tax system is the foreign tax credit. The foreign tax credit is designed to alleviate double taxation where U.S. and foreign governments' tax jurisdictions overlap-that is, the U.S. firm pays taxes at the higher of the U.S. or foreign tax rate. With respect to repatriated dividends, U.S. firms can claim foreign tax credits for foreign taxes paid by their subsidiaries on the earnings used to pay the repatriated dividends. The ability to defer U.S. tax, thus, poses an incentive for U.S. firms to invest abroad in countries with low tax rates. Proposals to cut taxes on repatriations are based on the premise that even this deferred tax on intra- firm dividends discourages repatriations and encourages firms to reinvest foreign earnings abroad and that a cut in the tax would stimulate repatriations. ~rktk ~ inr th,%z Armnir ,, The American Jobs Creation Act (P.L. 108-357) permitted a deduction equal to 85% of the increase in foreign-source earnings repatriated. For a firm paying taxes at the 35% corporate tax rate, this reduced the tax rate on repatriated earnings to the equivalent of 5.25%. Credits for foreign taxes paid were reduced by a corresponding amount. The act required firms to adopt domestic investment plans for qualifying repatriations and limited the maximum deduction allowed. The maximum allowable deduction was set equal to the greater of $500 million or the amount of earnings shown to be permanently reinvested outside the United States in a firm's books of accounts certified before June 30, 2003. According to an IRS study of the provision, 843 of the roughly 9,700 eligible corporations took advantage of the deduction. This sub-set of eligible corporations repatriated $312 billion in qualified earnings and created total deductions of $265 billion. Using the most recent year of data available, the data suggest that approximately one-third of all offshore earnings were repatriated in the tax year after enactment. The same IRS study also provided information on the recipients. The benefits of the repatriation provision are not evenly spread across industries. The pharmaceutical and medicine industry accounted for $99 billion in repatriations or 32% of the total. The computer and electronic equipment industry accounted for $58 billion or 18% of the total. Thus, these two industries accounted for half of the repatriations. Most of the dividends were repatriated from low tax countries or tax havens. As shown in Figure 1, the accumulation of funds that could be repatriated since the 2004 repatriation holiday has been concentrated in the health care and information technology industries. Together these industries account for over 50% of the total funds overseas according to a Credit Suisse report. Figure I. Permanently Reinvested Foreign Earnings, 2005-2015 250 ....... a ... .. ... .. 200S 20,6 2007 2C08 2009 2010 2011 2012 2013 2014 2015 1,, :nformari.:,n Tefhonogv Heaith Care t onsumer Disc etionary ,Fnandals ':IFncx r aE a Qther Source: David Zion et al., Parking Lots of Cash and Earnings Overseas, Credit Suisse Equity Research, March II, 2016. Stand-Alone Voluntary Proposals: Proposals were made in the 114th Congress that would have provided corporations the option to voluntarily repatriate previously untaxed earnings; apply reduced tax rates to these repatriations; and use the tax revenue to fund infrastructure K~:>

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Short-term subscription options include 24 hours, 48 hours, or 1 week to HeinOnline.

Purchase Access

Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most