US companies push for lower tax rate on offshore profits
WASHINGTON: Major US multinationals are pushing the Trump administration to deepen the tax break it has already tentatively proposed on $2.6 trillion in corporate profits being held offshore, a key piece in Washington’s intricate tax reform puzzle.
As President Donald Trump tries to deliver on his campaign promise to overhaul the tax code, lobbyists for technology, drug and other manufacturers are working with officials behind closed doors, six lobbyists working with various industries told Reuters.
In line with tax cuts already embraced by Republicans in the House of Representatives, the lobbyists said they are telling the White House and Treasury Department that if companies are forced to bring home, or repatriate, foreign earnings, they want a sharply reduced tax rate.
The lobbyists are making an aggressive case that cutting the tax rate on offshore profits to 10 percent from 35 percent, as the administration has indicated it may favor, is not enough.
Rather, the lobbyists said they want a lower, bifurcated rate of 3.5 percent on earnings already invested abroad in illiquid assets, such as factories, and 8.75 percent on cash and liquid assets.
During the 2016 presidential campaign, Trump proposed setting the rate at 10 per- cent and argued it could be used to raise tax revenue to pay for tax cuts or infrastructure.
Discussion of hard numbers in the longrunning repatriation debate may indicate tax reform is advancing on Trump’s slow-
Imake no apology for using this column from time to time to reflect the views of Capital Economics ( CapEcon), the London- based consultancy. CapEcon has called the region right for a long time, refusing to join the ranks of the habitual doom- mongers and instead producing a consistent stream of well- argued research that calls it like it is but does not get bogged down in prejudice or preconception.
Their analysts have been especially busy in the past week and produced several reports on Saudi Arabia, other Gulf countries and the energy outlook. Together, they make for a snapshot of the current state of the region in a state of challenge and transformation.
Probably the most significant was a paper last week under the title: “Saudi public finance figures suggest big spending cuts are over.” The context is the furor ( exaggerated, in my opinion) that accompanied the announcement last month that the government was reinstating some benefits to public sector workers that had been scrapped last October.
I thought then that talk of a “U- turn” was overblown, and CapEcon agrees. On the basis of recently released figures from the Ministry of Finance that give a first- ever quarterly update on the Kingdom’s budget position, it could afford the benefits resumption and can even afford a further easing of “austerity” in the coming months.
The official figures show the deficit came in at SR26.2 billion ($ 7 billion) or around 4.3 percent of gross domestic product ( GDP). That is still big for a country that until 2014 enjoyed many years of oil- fueled surpluses but it is a dramatic improvement on the position in the first three months of 2016 when the deficit was a shocking SR91 billion, or 15 percent of GDP.
The rising oil price over the past 12 months helped, of course, giving a boost to oil receipts. The cuts in production were more than offset by the rise in price, so the much- maligned policy pursued by the Saudi government and the Organization of the Petroleum Exporting Countries ( OPEC) has had a positive effect after all.
Non- oil revenues also rose but only by 1 percent, a “disappointing” performance that CapEcon puts down to a drop in investment returns from the Saudi Arabian Monetary Authority ( SAMA) and from the Public Investment Fund ( PIF). That needs further elaboration at some stage.
On the cost side of the Kingdom’s account, there was a 2.5 percent fall in government spending but this compared with up to 25 percent in 2015- 2016. “In short, the big spending cuts seem to be over. And we think there is scope for austerity to be eased further in the moving domestic policy agenda. Or it may just be lobbyists trying to set the early framework for a long slog ahead, which could be adjusted if they get concessions elsewhere.
“For us, it is how you create a tax environment where you give business longterm certainty,” one lobbyist said.
The changes being discussed are part of larger tax reform, another lobbyist said: “Our international tax system is out of whack with the rest of the world. This system is not sustainable.”
The lobbyists’ demands represent the latest effort in a push by corporate America that has been underway since 2004-2005, the last time Washington let multinationals pay only a small fraction of the taxes due on their foreign profits.
Repatriation and comprehensive tax reform are important to the economy, Apple Inc. CEO Tim Cook said earlier this month on CNBC. “The administration ... they are really getting this and want to bring this back and I hope that that comes to pass,” he said. Apple held $239.6 billion of cash and coming months,” CapEcon said.
The big question now is whether consumer spending will reflect the easing of tight finances and get Saudi citizens spending again, which will be vital if the non- oil sector recovery is to continue. Much of that is down to consumer confidence and that is heavily influenced by the oil price.
On the oil front, CapEcon thinks it likely that the OPEC production cuts will be extended when ministers from oil- producing countries meet in Vienna later this month. That much was already in the market and has helped lift Brent above $ 50 at the end of last week.
But it is unlikely, the consultancy says, that OPEC will agree to any deepening of the cuts. There has been some speculation about this but it is probably unnecessary as current levels are deemed to be enough to bring global crude stock closer to the five- year average, which OPEC sees as the crucial criterion.
It would also be politically difficult to get all oil producers, including Iran, Iraq and Russia, to agree to further cuts, raising as it does the specter from the 1980s of everdeeper production cuts being chased all the way down by falling prices and declining economies.
The wild card here, of course, is US shale production. You can expect their growing levels of output to feature in the upcoming conversations between US President Donald Trump and Saudi Arabia’s leaders in the upcoming US state visit to the Kingdom, but only marginally.
The Gulf countries are in a better position to withstand the continuing pain of lower oil prices than at any time over the past five years, CapEcon says. The mood in the Gulf is: Let shale do its worst — we are ready.
Finally, even against the generally positive background of the Gulf economies, CapEcon thinks one country stands out. The UAE is the “bright spot in the Gulf,” it said, because of the recovery of the non- oil sector, the easing of fiscal austerity, robust global economic growth, and the impetus starting to come through from preparations for the Expo 2020 event. The consultancy’s GDP forecasts are higher than the consensus and that of the International Monetary Fund ( IMF), at 2.5 percent this year and 3.5 percent next.
CapEcon has had a good track record in the past; time will tell if it is right this time. Maybe we will get further clarity when the IMF country teams deliver their verdicts later this month. Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai securities offshore as of April 1.
Under current law, US-based corporations are supposed to pay 35 percent income tax on profits worldwide. But companies can defer that tax on active profits left outside the country.
The deferral rule has incentivized multinationals to park profits offshore and about $2.6 trillion in earnings is being held overseas by more than 500 US companies, according to Audit Analytics, a corporate research firm.
Nearly a third of that is held by 10 companies, including Apple, Microsoft Corp., Pfizer Inc. and General Electric Co., the firm said. All four of those companies declined to comment.
These companies and hundreds of others could bring their foreign profits into the US at any time, but they do not in order to avoid paying the 35 percent tax due.
If the $2.6 trillion overseas were repatriated at once, two things would happen. First, Washington would get a big jolt of tax revenue. Second, repatriated profits not collected by the Internal Revenue Service (IRS) could be put to use in the economy.
As the law stands, tax-deferred profits can be held offshore indefinitely. The result of that has been companies biding their time, claiming their profits are “trapped” offshore while lobbying for a repatriation tax cut. The last time they got one was in 20042005 under former President George W. Bush, whose administration let multinationals voluntarily repatriate profits at a 5.25 percent tax rate.
At the time, Bush tried to extract promises from companies that they would dedicate repatriated funds to investments in new plants and other job-creating projects.
But in a 2011 follow-up study, a Senate committee concluded the Bush repatriation tax “holiday” cost the Treasury at least $3.3 billion in net revenue over 10 years and “produced no appreciable increase in US jobs or domestic investment.”
Rather, the repatriated funds largely went to shareholder dividends and executive bonuses, the committee said.