Is it possible that U.S.-based multinationals are getting tired of waiting for Congress to enact corporate tax reform? Seeking cash for domestic acquisitions, some of the nation’s best-known firms are starting to bring back their foreign earnings. Some are finding ways to avoid paying tax at all on that income. Others are so anxious to put the money to work in the U.S. that they are paying stiff taxes to do so.
The no-tax method is being practiced by U.S. based multinationals that move their headquarters to eliminate U.S. taxes on foreign profits. The current poster child for this tactic, known as an inversion, is drugmaker
Pfizer isn’t alone. Published reports identify
Other multinationals are paying hefty taxes to tap their foreign profits. For instance, in April
In the short run, at least, many lawmakers—and the Treasury—are happy to see eBay and others pay taxes on overseas income. By contrast, the Pfizer bid—which has so far been spurned—has predictably troubled Democratic lawmakers and even some Republicans. Senate Finance Committee Chair Ron Wyden (D-OR) wants to curb inversions. The Obama Administration included similar restrictions in its recent budget. And Senator Carl Levin (D-MI) promises his own bill this week.
But what does all this say about tax reform? For years, critics have argued that by taxing foreign income at high rates while allowing firms to defer taxes until they bring that money home, the U.S. tax system has locked up funds and discouraged domestic investment.
A tax rewrite would make deals like Pfizer’s less attractive in two ways. First, it would lower U.S. corporate rates. Second, it is widely expected that reform would couple a new tax regime with special transition provisions to allow firms to bring foreign earnings back to the U.S. with a big tax discount.
House Ways & Means Committee Chair Dave Camp’s reform bill and the rewrite proposed by former Finance panel chair Max Baucus both include a repatriation tax holiday. The idea is popular with lawmakers because congressional scorekeepers would count it as a tax increase, generating extra revenue to finance cuts in tax rates.
Trouble is, given ongoing political gridlock in Washington, tax reform is likely to happen later rather than sooner.
Some multinationals can afford to wait. They are awash in cash and seem to have little interest in doing much with it other than buying back their own stock. Plus, with interest rates so low, it is cheaper for them to borrow the money than repatriate foreign earnings at a 35 percent tax rate.
Other firms, however, need cash now. And they can’t keep their corporate profits locked up while Congress fiddles.
If repatriation and inversions really start to catch on, they could change the political dynamic for tax reform. The more firms repatriate foreign income, the less interested the business community will be in a corporate tax holiday and, perhaps, even broad reform. And, not incidentally, the less tax revenue a holiday would produce to finance rate cuts. These trends could further divide an already-split business community and end up making corporate reform even tougher than it is now.