Sunday, April 3, 2011

Obama administration states tax holiday for corporations that repatriate income from tax haven countries is poor policy

The federal government loses corporate income tax revenue from the shifting of income into low-tax countries, often referred to as tax havens. The revenue losses from this tax planning are hard to estimate, but it has been suggested that the annual cost of offshore tax abuses may be around $100 billion per year.  Pursuant to Section 862 of the Internal Revenue Code ("the Code"), corporations formed in the U.S. are taxable on certain income from outside the U.S.  Foreign corporations with U.S. owners however, can often earn and accumulate certain income without federal tax.  For controlled foreign corporations (CFCs),defined in Section 957 of the Code, the non-U.S.-source income may be shielded from U.S. tax until it is actually brought back to the U.S. (i.e., repatriated and distributed to the U.S. owners).  Remarkably, the American Jobs Creation Act of 2004 ("AJCA") provided a one year tax special treatment for CFCs to repatriate their income by providing an 85% dividends-received deduction.  It has been estimated that approximately $312 billion was repatriated under this provision.
Recently, in a blog post on March 23 titled “Just the Facts: The Costs of a Repatriation Tax Holiday,” the Treasury Assistant Secretary for Tax Policy, Michael Mundaca, stated that there was no evidence that the AJCA repatriation tax holiday increased U.S. investment or jobs, and that it in fact cost taxpayers billions of dollars. He wrote that “just five firms got over one-quarter of the tax benefits of the repatriation holiday, and just 15 firms got more than 50 percent of the benefits,” and cited to a Congressional Research Service report that found most of the largest beneficiaries actually cut jobs following the tax holiday and used the repatriated funds to repurchase stock and pay dividends.

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