Cash hoards unlikely to roar back to U.S. from Canada
Trump’s tax break on offshore profits won’t have big effect here, experts say
Giving U.S. companies a tax break to repatriate their foreign cash hoards was one of Donald Trump’s major campaign promises, but while money may come “roaring back” from some jurisdictions, experts say Canada isn’t likely to be one of them.
Trump, who will be inaugurated in January, has frequently touted a tax plan that includes “a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10 per cent.”
It is aimed at enticing American companies to send home some of the estimated US$$2.9 trillion in accumulated earnings offshore, according to Japanese financial holding company Nomura, much of which sits in jurisdictions where companies pay well below the current 35 per cent U.S. corporate tax rate.
(Under current rules, U.S. companies must pay the difference between what they have already paid in foreign taxes and the U.S. rate if they bring the cash home.)
On the campaign trail, Trump suggested the impact of such a tax holiday would be “phenomenal.”
But while 10 per cent may be a sweet deal for U.S. firms with operations in low-tax jurisdictions, such as the Bahamas, it is less of an incentive for firms that have already been subjected to Canada’s middle-of-the-pack corporate tax rate of 27 per cent (including the provinces), said Jack Mintz, an economist and President’s Fellow at the School of Public Policy at the University of Calgary.
“It doesn’t mean that some companies won’t do some (remissions), but I don’t expect a major cash drain,” Mintz said.
Part of the reason is that there are already other ways American firms can send that money home from Canada, without paying the full tax bill.
These include declaring dividends from a Canadian subsidiary to its U.S. parent, while also deferring tax deductions, which can bump up the total tax bill paid on those dividends in a given year to the Canadian government, he said. That amount would be credited against the amount of tax paid to the U.S. government, reducing it significantly, said Mintz.
The real beneficiaries of any tax holiday are likely to be U.S. multinationals such as Apple, which alone will have US$230 billion in cash held offshore by the end of 2016, according to Moody’s estimates.
Trump has promised that not only will companies bring their money home, but that repatriation will have significant overflow benefits for the economy.
The historical record, however, has not found that to be the case.
Under George W. Bush’s Homeland Investment Act in 2004 — which offered a one-time repatriation tax rate at 5.25 per cent — much of the money that came streaming back went toward stock buybacks and executive bonuses, said Kevyn Nightingale, international tax partner with MNP in Toronto.
The exact nature and wording of Trump’s plan could also determine its economic impact.
The term “deemed repatriation” signals it would be compulsory, rather than voluntary, said Chye-Ching Huang, senior tax policy analyst at the Center for Budget and Public Policy in Washington, D.C.
If “deemed,” U.S. corporations would be taxed at 10 per cent on the amount of foreign corporate earnings it has declared, whether or not the cash is actually repatriated, she said. Financial Post
It doesn’t mean that some companies won’t do some (remissions), but I don’t expect a major cash drain.