Should the US Lower Tax Rates on US Multi-National Corporations?

Should the US lower its tax rates to allow US multi-national corporations (USMNCs) to repatriate earnings allegedly re-invested offshore?

In the news, several USMNCs are lobbying the President and Congress to further lower the tax rate on repatriation of earnings allegedly re-invested in offshore operations that was proposed by the White House to be taxed at 15%.  This Reuter's Article, suggests that the USMNCs are seeking to lower the current 35% tax rate on repatriation of earnings to 3.5% tax rate on earnings already invested abroad in illiquid assets, such as factories, and 8.75% tax rate on earnings cash and liquid assets.

The Reuter's article speculates that the repatriated earnings/cash and taxes raised from the repatriated earnings/cash could raise tax revenues and funds the expansion of the US economy:  "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 could be put to use in the economy."

The last time the US had a "tax repatriation holiday" was in 2004-2005, and the results of the tax repatriation holiday show that the alleged reinvestment into the US economy by the USMNCs that took advantage of the 5.25% lowered rate on the repatriation of earnings did not occur.  In 2001, as noted in the Reuter's article, the Senate held a hearing into the effects of the 2004 repatriation holiday and determined that the repatriation cost the US treasury at least $3.3 billion in net revenue over 10 years and produced no appreciable increase in U.S. jobs or domestic investment.  Instead, the repatriated funds were used to buy back shares and to pay executive bonuses.

Finally, the Reuter's article notes that this may be an effort of lobbyists for the USMNCs to signal the log fight ahead to achieve the new repatriation tax holiday by initially setting the percentages low, and therefore reaching a "compromise" at a slightly higher percentage.

The Reuter's article raises a fundamental question, namely: Should Congress and the President be considering passing tax reform implementing a reduced tax rate for the repatriation of earnings, or should we be looking at other ways to reform the current corporate tax "imbalance" problems, when there are no benefits (as reflected in the most recent tax repatriation holiday)?

This Bloomberg article suggests that the benefits of a tax repatriation holiday touted by USMNCs are just myths as follows:

  1. The article stats by quoting Trump's economic advisor touting that the repatriation of earnings will cause a boost to the U.S. economy.  Contrast this statement with the Senate PSI findings of fact in its 2001 study on the 2004 tax repatriation holiday, where the Senate PSI determined that after repatriation over $150 billion dollars, the top 15 USMNCs actually reduced its workforce by 20,931 jobs.  Also there was no new R&D expenditure by the top 15 USMNCs that took advantage of the tax repatriation.
  2. The article then states that companies have been borrowing funds in the US at historic rates and that any perceived additional tax revenues would have to be low enough to incentivize the companies to forego borrowing the money and repatriating the offshore earnings/funds.  Contrast this point with the Senate PSI findings that the repatriation holiday actually reduced tax collection by $3.3 billion over 10 years, and leads to the conclusion that a tax repatriation holiday would not generate tax revenue because the tax rate would have to be so low, and historically speaking there would be a net loss over 10 years of taxable revenue attributable to the tax holiday.
  3. The article points out that the borrowed funds by USMNCs have been used for stock buy backs and executive bonuses.  Compare the use of the repatriated funds from the 2004 tax holiday which were almost exclusively used to fund stock buy backs and executive compensation with the current use of borrowed funds by the top USMNCs and this suggests that any repatriation holiday will continue this trend.
  4. Finally, the article points out that clearing a supposed hurdle to the repatriation of offshore earnings (lowering the tax rate) may not incentivize USMNCs to repatriate the funds because they have operations overseas, or may continue to benefit from the sequestering of offshore earnings in lower tax jurisdiction.  Compare this myth with the Senate PSI findings that post 2004, more USMNCs increased, not decreased, their offshore earnings accumulation rate.

Both articles suggest that repatriation of offshore earnings at a lower rate for USMNCs, when coupled with the Senate PSI findings, reflect unsound US tax policy.  However, it appears as if Congress and the White House continue to buy into the myth that the USMNCs are perpetuating that a repatriation tax holiday is the remedy that will increase the US economy, generate more US tax dollars and spur economic growth.  Despite the message the USMNCs are sending, Congress and the President should look at historical data to see that the myth of a one quick fix solution (repatriation tax holiday) is a failure.

If you know of any company or individual that has sheltered funds offshore, and would like assistance in assessing and filing your IRS whistleblower claim, please CONTACT US.  The IRS Whistleblower Program pays between 15-30% if collected proceeds when the IRS proceeds based on a whistleblower's substantial and credible information.


Tax Holidays and Tax Amnesty Programs: Do they work or are we just giving tax violators a break?

In recent news, the State of Alabama is considering creating a tax amnesty period from June 30 through Aug. 30, 2016.  The amnesty program will apparently forgive tax liabilities related to individual and business income taxes, sales and use tax, lodgings tax, severance taxes, cigarette taxes and business privilege taxes. While some exclusion from the program are motor fuel taxes and certain healthcare and environmental taxes.  As noted by the Bloomberg blog, other states have also instituted amnesty programs, Massachusetts, or are considering implementing a tax amnesty program, South Carolina.

The IRS also has several amnesty programs in place for people that have not filed their taxes or have not paid their tax liabilities.  The programs are as follows:

  1. Domestic Tax Amnesty for unfiled tax returns or unreported tax liability (Voluntary Disclosure, See IRS IRM provisions.  See also blog discussing how far back to file unfiled tax returns.)

  2. Offshore Voluntary Disclosure Program

Additionally, Congress has, in the past, instituted a one-time tax holiday to allow U.S. multinational corporations to bring back money the multinational corporations had previously invested in its offshore foreign subsidiaries.  See NY Times article about the 2004 tax amnesty and its effects.  See also the article and the Senate PSI report stating that the promised 2004 tax repatriation holiday failed to meet the promised benefits of new jobs, or research and development (R&D) expenditure. 

The 2004 tax holiday allowed corporations to repatriate amounts held offshore at a reduced rate 5.25% instead of the statutory corporate rate of 35%.  The PSI report highlights the fact that the 2004 tax holiday permitted corporations to bring back $312 Billion.  The PSI report also highlights that while the 2004 law prohibited the repatriated funds for stock repurchases or executive pay, there was no mechanism for monitoring the use of the repatriated funds, so most of the funds were used exactly for stock buybacks and increased executive pay.

There have also been recent attempts by Congress to allow another tax holiday to allow U.S. multinationals to repatriate offshore funds.  In 2014, Senators Boxer and Paul introduced an infrastructure bill tied to a tax holiday (a 6.5% tax on repatriation of funds over a five year period).  The Boxer-Paul bill prohibits dividends, shareholder buybacks or executive compensation for 3 years and the revenue generated would by the 6.5% tax would fund infrastructure projects.  However, as presented in the Salon article, and as reported in Bloomberg, the Joint Committee on Taxation determined that such a tax holiday would really cost taxpayers $96 billion over 10 years.

An alternative to a tax repatriation holiday appears to be a transitory tax on “permanently reinvested offshore earnings.  Such a transitory tax was proposed by former House Ways and Means Chairman Dave Camp in the Tax Reform Act of 2014.  As stated in The Center on Budget and Policy Priorities article, “Repatriation Tax Holiday Would Lose Revenue And Is a Proven Policy Failure” by, The Tax Reform Act of 2014 proposed to tax all offshore profits as a transition to a new international tax system that would generate an estimated $170 billion of revenue over 10 years for the Highway Trust Fund. 

President Obama has also introduced a budget proposal (fiscal year 2015) which would utilize revenue from transitioning to a new corporate tax system to finance infrastructure.  See the CBPP article.  The President’s proposal would require multinational corporations to pay a one-time U.S. tax on the profits held overseas prior to changing the permanent way the U.S. would account and tax the offshore profits currently not being taxed.  The President’s proposal allegedly would generate taxes in the amount of $268 billion over 10 years to fund infrastructure improvements.  See this CBPP article comparing transition tax and repatriation tax holiday.

As the CBPP articles reflect, and the PSI’s examination of the 2004 tax holiday, a tax repatriation holiday does not work to generate present and future investment in the United States.  Instead, the empirical data suggests that companies will use the repatriated funds to:

  1. Repurchase Shares from Shareholders or pay dividends to shareholders;

  2. Increase Executive Compensation;

  3. Terminate workers in the United States;

  4. More Aggressively transfer profits offshore to increase amounts “held” or “permanently reinvested offshore” to avoid U.S. taxes because Congress will just grant another tax repatriation holiday in the future.

Following the 2004 tax repatriation holiday as an example of what to expect when IRS or States permit tax violators to be forgiven of their tax liabilities through tax holidays or tax amnesty program, the question to ask is: Why are the tax violators getting a break at the expense of compliant taxpayers?  Or alternatively: Shouldn’t government be in the business of rewarding compliance instead of rewarding habitual tax violators?

How can governments reverse or flip the logic behind a tax holiday or tax amnesty program?  Maybe the governing bodies should reward compliant taxpayers by allowing them to reduce their tax rate for each year of compliance.  Or maybe governments could permit additional deductions/exemptions or reduce phase-outs for deductions for the taxpayers that are compliant and based on the length of compliance.  If the goal is compliance and tax collection, shouldn’t the carrot be a reward for compliance instead of rewarding habitual tax violators by giving them a break for their continued tax violations.  Something to think about.

If you know of any individual or corporation that has not paid their tax liabilities or has habitually avoided paying its taxes, you should file a tax whistleblower claim.  The IRS has a whistleblower program that will pay between 15% and 30% of the collected proceeds (that exceed $2,000,000) to whistleblowers that provide specific and credible evidence of the tax violations of the individuals/corporations.  Contact us to evaluate your claim and to file your claim for an IRS award.