Under current law, if a corporation has off shore earnings those amounts are generally not subject to US income tax until they are repatriated (brought back) to the US. We are strong advocates for non-US earned income being allowed to be brought back to the US for further investment without a tax implication. We think this makes great economic and tax policy sense.
Currently, pressure is building for Congress to enact a repatriation holiday. Previously, the America Jobs Creation Act (AJCA) of 2004, permitted U.S. corporations to repatriate income held outside of the U.S. at an effective tax rate of 5.25% instead of the top 35% corporate income tax rate. However, prospects for passage of a new repatriation holiday are uncertain as proponents and opponents spar over whether repatriation would actually spur increased domestic investment and U.S. jobs, or result in a windfall to large multinationals. Unlike the 2004 bill, we believe that Congress should tie the repatriation holiday to capital investment (creating or expanding facilities) and job creation.
By all accounts the 2004 repatriation holiday was not well thought out. On October 11, Senator Mark Levin (D-MI), Chair of the Senate Permanent Subcommittee on Investigations, issued a detailed report highly critical of the 2004 repatriation holiday. The report found that the top 15 repatriating companies increased corporate stock buybacks and executive pay, reduced their overall U.S. workforce by nearly 21,000 jobs, and cut the pace of R&D spending after the tax break. This substantiates our belief that repatriation without safeguards is not good economic or tax policy.
The Freedom to Invest Act of 2011, H.R. 1834, was introduced in the House on October 11 by Reps. Kevin Brady (T-TX) and Jim Matheson (D-UT) with 59 cosponsors, would allow a U.S. corporation to deduct dividends received from a controlled foreign corporation. The bill would reduce the amount of the tax deduction for corporations that fail to maintain specified employment levels for full-time U.S. employees.
On the Senate side, Senators Kay R. Hagan (D-NC) and John McCain (R-AZ) have introduced S. 1671, the Foreign Earnings Reinvestment Act, which is similar to H.R. 1834, but would provide additional incentives for companies to use repatriated earnings to grow their payrolls, and penalize companies that lay off workers after participating in the program.
We believe that we will see some type of repatriation holiday in the near future. We will keep you apprised of the progress of these bills and potential planning opportunities. Please let us know if you have any questions regarding repatriation or offshore earnings.