Trillions stranded abroad to get a bit closer to home
THE next president may have a rare opportunity to close tax loopholes that have let American corporations stash more than $2 trillion in untaxed profits overseas.
There is a growing political consensus that the time has come for change in the tax rules to encourage repatriation of the vast troves of corporate earnings held outside the country. By declaring that foreign profits are permanently or indefinitely reinvested abroad, American companies can defer taxation on that money. Estimates of that money extend from about $2.4 trillion to roughly $3 trillion.
Hillary Clinton and Donald J Trump have indicated they plan to tax at least some of that money and induce corporations to bring it home. Leading plans in Congress include an approach called deemed repatriation – in which untaxed foreign corporate profits are subject to immediate taxation. The plans would provide a gigantic infusion to the Treasury and give corporations an incentive to move money home, said Edward D Kleinbard, the former chief of staff of the congressional Joint Committee on Taxation.
Corporations are required to pay a federal tax rate of 35 percent. If all of that money had been taxed at that rate, it would total $910 billion in taxes. The lost corporate tax revenue would amount to almost two-thirds of all the money ($1.39 trillion) paid by Americans in personal income tax in 2014, according to Treasury data. And the lost tax revenue is more than 2.5 times the income tax paid annually by American corporations.
In 2004 when the American Jobs Creation Act granted a “tax holiday”, in which companies were allowed to bring money home at a 5.25 percent tax rate, they used very little of their repatriated money to create jobs. Most of the cash flowed to investors in the form of buybacks and dividends.
If $1 trillion were repatriated and companies funnelled nearly all of it to their shareholders, the windfall would come close to the $975 billion in buybacks and dividends for all S&P 500 stocks for the 12 months through June, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
In a report for clients, Goldman Sachs suggested that investors consider buying shares of companies with the biggest untaxed foreign earnings: Microsoft, General Electric, Apple and Pfizer, which top the list of untaxed earnings giants compiled by Audit Analytics, a research firm.
If the United States and tax haven countries harmonised their rules, tax collection would be more effective. It will be up to the next president and Congress, and their counterparts abroad, to decide what to do about the gigantic pot of money sitting overseas.