Repatriation Bill to Tax Overseas Profit at 8.75 Percent

October 25, 2011, 17:00 / Advisory / Jurisdictions: USA, Source: Bloomberg

Corporate repatriation legislation proposed by Senators Kay Hagan and John McCain would let U.S. businesses bring home offshore profits at an 8.75 percent tax rate.

The rate on repatriated profits would drop to 5.25 percent if a company’s payroll expanded during 2012, according to a summary of the bill released by Hagan’s office. The current top corporate rate is 35 percent.

To qualify for the lowest tax rate, a company would have to increase its payroll by 10 percent as measured by additional workers or higher employee pay.

“I hope that Congress can act quickly so that the president can sign repatriation legislation that will take effect this fall,” Brady said in a statement.

2004 Tax Holiday

Independent studies showed that when a tax holiday was last offered, in 2004, the lower tax rate for returning profits spurred little hiring or domestic investment. Most of the money was used to buy back stock. Democrats have said they are concerned that could happen again with a tax holiday.

Under the Hagan-McCain proposal, if a company repatriates profits and then reduces its staff, it would be required to add $75,000 to its gross income for every position eliminated.

That differs from Brady’s legislation, which would require a company to increase its taxable income by $25,000 for every position cut. Brady’s bill would allow companies one year to repatriate offshore profits at a tax rate of 5.25 percent.

The congressional Joint Committee on Taxation has estimated that a tax holiday would cost the Treasury $78.8 billion in forgone revenue over 10 years if the money was brought back to the U.S. at a tax rate of 5.25 percent.

Tax attorney H. David Rosenbloom said that adding to a company’s gross income, as the Hagan-McCain proposal does, may be friendlier to business than adding to its taxable income because it provides more chances to whittle down a tax liability through the use of deductions and credits.

“Generally, the higher up on a tax form the number appears, the more opportunities there are, the more things that can occur, said Rosenbloom, a partner at Washington-based Caplin & Drysdale Chartered and director of the international tax program at New York University’s law school.

Rosenbloom said lawmakers were embarrassed following the 2004 repatriation when some companies that participated in the tax holiday eliminated jobs.

‘‘This is basically to keep Congress from getting caught red-faced again,’’ said Rosenbloom.

Chuck Marr, director of federal tax policy at the Washington-based Center on Budget and Policy Priorities, which advocates for low-income people, said the Hagan-McCain proposal contains no incentives to create jobs.

‘‘The lower rate strikes me as a fig leaf,’’ Marr said. At 8.75 percent, companies ‘‘are getting a very low rate with no strings. It’s a 75 percent discount.’’

Infrastructure Bank

Senator Charles Schumer of New York, the chamber’s No. 3 Democrat, said in June that Senate Democrats might be open to using the short-term revenue provided by a corporate tax holiday to finance an infrastructure bank.

Using proceeds of a tax holiday to pay for infrastructure projects would mark a difference between Senate Democrats and the Obama administration. The administration has said it won’t consider repatriation outside of a broader tax-code overhaul.

A coalition of businesses, including United Parcel Service Inc. and Boeing Co., which are lobbying Congress for a lower corporate tax rate, did not comment directly on the Hagan-McCain proposal.

‘‘We view the repatriation issue as something that should be considered within the context of a comprehensive reform of the corporate tax system,” Jim Pinkerton, co-leader of the RATE Coalition, said in a statement.

Two other measures that address repatriation are pending in Congress. Legislation proposed by Representative Shelley Berkley, a Nevada Democrat, would let companies bring home offshore profits at a 25 percent tax rate, and lower if they increase their payrolls.

Senator Mike Lee, a Utah Republican, has proposed an amendment to a currency bill now being considered that would lower the tax rate for returning profits to the U.S.

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