AFP Survey: Tax Rates Discourage Repatriation

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The U.S. corporate tax rate provides an incentive for companies to keep moneys earned outside the U.S., well, outside the U.S., according to a recent survey of more than 800 corporate finance folks by the Association for Financial Professionals (AFP). Slightly more than one-fourth of respondents say that “excessive U.S. corporate tax discourages their organization from bringing cash back to the U.S. and using it to invest in corporate growth,” the AFP said in a statement.

What's more, while those in favor of the current tax rate on repatriated earnings say that the tax keeps companies from investing in their operations outside the U.S., that's really not the case, survey participants said. Two-thirds said that the tax on repatriated earnings has little or no influence on their firms' decisions to invest and operate outside the U.S.

In addition, a lower tax rate on repatriated earnings might actually boost tax revenue in the U.S., as companies would no longer have a reason to invest elsewhere with the intention of avoiding high taxes here. During a tax holiday enacted in 2004 through the American Jobs Creation Act (AJCA), companies that repatriated earnings paid taxes at a rate of 5.25 percent, versus the 35 percent rate that previously had been in place. Companies brought back to the U.S. more than $300 billion, the AFP estimates, generating some $15 billion in tax revenue.

Today, some estimate that U.S. firms currently hold more than $1 trillion outside the U.S. If this all headed back home, that could mean $50 billion more in Uncle Sam's wallets (at a 5.25 percent tax rate), leaving the companies with another $950 billion to invest in the U.S.

On the other hand, a study of the 2004 AJCA tax provision by the Congressional Research Services indicates that its impact on the economy was fairly limited. Of the 9,700 companies eligible for the holiday, 843 took advantage of it, repatriating $312 billion. However, while the companies were required to have a plan for reinvesting earnings before they could claim the deduction, the AJCA allowed companies a fair amount of latitude in determining how they would reinvest it. One study cited in the CRS report estimated that for each dollar repatriated, stock repurchases jumped by 91 cents. "While empirical evidence is clear that this provision resulted in a significant increase in repatriated earnings, empirical evidence is unable to show a corresponding increase in domestic investment or employment."

There is nothing to suggest that the companies that repatriated earnings in 2004 and then boosted share purchase plans did anything illegal. However, if a similar provision is enacted now with the idea of jump-starting the economy, tighter controls on the investments allowed will be needed. ###

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Karen Kroll supplies the Business Finance community with reporting and commentary examining cash management and treasury-related topics.

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