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Firms want to bring foreign money home at discounted tax rate

The economy in the U.S. has been rough on many companies over the last few years. Many of the major U.S. tech companies have huge amounts of money sitting in overseas accounts that they argue could be used to fund hiring and other programs at home.

The catch is that the tax rate on bringing that foreign money home is a blistering 35% according to CNN Money. These companies are backing a major lobbying campaign to get lawmakers in Washington to give them a tax holiday that would allow the foreign money reserves to be brought home at a massive savings on tax day. The major companies are lobbying for a tax rate on the money in the area of 5%.

The lobbying push is still in the planning stages, but so far major tech firms Oracle, Cisco, and Apple are backing the efforts. Other major companies include Duke Energy and Pfizer. Between these firms, they have an estimated $1 trillion squirreled away in foreign accounts.

The lobby effort hopes to win that steeply discounted 5% tax holiday for backers for a full year. The goal is to get the tax holiday included in the reform package. If the overall reform package fails in Congress, CNN Money reports that the firms will attempt to push their tax holiday agenda separately.

The fight for the tax holiday is going to be hard on the companies and the lobbyists. Congress approved a similar tax holiday in 2004 as part of a package to promote new jobs in the U.S. and many of the companies that took advantage of the holiday to bring foreign money home instead used the money as dividends for shareholders. A study that looked at the holiday conducted by the National Bureau of Economic Research found that for each dollar of cash brought home in that holiday the companies bumped shareholder payouts in the area of 60 to 92 cents.

Kristin Forbes, co-author of the study, said, "A tax holiday would bring a substantial amount of cash back to the United States and paying that out to shareholders is good for the economy. But if you're a politician claiming this will create a lot of jobs or new investment, it isn't supported by the data."

This time around the companies aren’t hiding the fact that some of the loot brought home would be handed directly to shareholders. However, the companies are also claim that the tax holiday would allow them to boost markets and increase consumer confidence and the tax revenue from bringing the funds home could allow as much as $50 billion in credits to encourage new hiring.



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RE: Don't larry and Steve have enough money?
By mcnabney on 2/17/2011 1:12:42 PM , Rating: 0
And how would this be different from you or me choosing not to have taxes withheld and then not file for 5 or 6 years. Then ask for a 'tax holiday' to declare your past earnings?


RE: Don't larry and Steve have enough money?
By Solandri on 2/17/2011 2:07:19 PM , Rating: 2
I worked in Canada for a few years. One of the things I had to grapple with was international taxes. Apparently the U.S. is unusual in that if you're a U.S. citizen, the U.S. taxes all your income. Most countries tax based on residence. If you're Canadian and live in Canada more than half the year, you pay Canadian taxes. If you're Canadian living in the U.S., you pay no Canadian taxes.

But I'm a U.S. citizen, so the U.S. taxes everything I make regardless of where I make it. This meant that if I lived in Canada, I would be double-taxed. Canada would tax me because I lived in Canada. The U.S. would tax me because I am a U.S. citizen. There's a tax treaty between the two countries covering earned income - basically the income tax I paid to Canada gave me a tax credit which I could apply to my U.S. income tax (since Canadian income taxes were greater, I paid no U.S. income taxes). But unearned income like interest on my savings account, mutual funds, etc. would have been double-taxed. Canada also doesn't recognize the Roth IRA as a retirement account, and I would've had to pay Canadian taxes on the interest I earned on it (even though it was a U.S. account and funded with U.S. money I earned before moving to Canada).

So I ended up living just across the border in Washington and commuting to work in Vancouver every day. Yeah it was a hassle and ecologically unfriendly (fortunately Vancouver has a good public transportation system), but it was the only way to avoid being double-taxed on my non-job income.

Anyway, my point with all this is that international tax structures are in no way consistent nor make any sense. They just are the way they are. You think the sales tax loophole between states is bad? International taxes are even worse. Trying to draw a parallel between how taxes between two countries mesh with how taxes are handled domestically is fruitless - there are just too many exceptions, loopholes, and treaties to draw a reasonable analogy.

And in fact the one way to do taxes which makes the most sense to me (tax based on where the money is earned) is not the position held by most countries (including the U.S.). I would have gladly paid a source-based tax. But the way the tax structures were set up between the two countries meant my choices were to avoid Canadian taxes (except for my Canada-based job) and pay only U.S. taxes, or to be double-taxed. I'm not stupid; I chose not to be double-taxed. It means Canada is not getting tax on interest income I'm earning in my Canadian bank account. That's unfair for Canada, but then double-taxing me on everything is even more unfair for me. There was no way to solve the situation without it being unfair for someone.

The money these companies hold overseas for the most part isn't money that they made in the U.S. It's money they made in other countries. Yet the U.S. government feels that if it should be brought into the U.S., they are suddenly entitled to 35% of it. That's the part that seems to make no sense. Unfortunately it's difficult or impossible to distinguish between a company moving money out of the U.S. to avoid paying any taxes on it, and a company moving money out of the U.S. to fund legitimate operations overseas. So the U.S. takes a "assume the worst case" approach and just taxes everything coming in as if everyone were trying to dodge taxes.

There is no right or wrong answer here. It simply is the way it is. Leave the tax rate at 35% and you collect on tax dodging companies who try to bring their money back in. But you also prevent legit companies from using money they make overseas to expand business in the U.S. Drop the tax rate to 5% and you allow legit companies to use money they make overseas to expand business in the U.S., but you also allow tax dodgers to bring their money back in cheaply.


RE: Don't larry and Steve have enough money?
By mcnabney on 2/17/11, Rating: 0
By Solandri on 2/17/2011 3:44:32 PM , Rating: 2
Sorry if I didn't explain clearly. My wages wouldn't have been double taxed because the U.S. and Canada have a tax treaty to cover this situation for wages and certain retirement accounts.

My savings, mutual funds, and Roth IRA would have been double taxed had I lived in Canada. e.g. Say my savings account ears $100 in interest, the U.S. takes (say) 25% of that, and Canada takes (say) 30% of that. So I'd be paying $550 in taxes on it, instead of just $25 if I'd lived in the U.S., or $30 if I were a Canadian citizen living in Canada. In the case of the Roth IRA, U.S. tax rate on appreciation of those funds is zero, but Canada didn't recognize it as a retirement account so would tax that appreciation. So yes it is double taxation.


By DanNeely on 2/17/2011 3:05:46 PM , Rating: 2
quote:
There's a tax treaty between the two countries covering earned income - basically the income tax I paid to Canada gave me a tax credit which I could apply to my U.S. income tax (since Canadian income taxes were greater, I paid no U.S. income taxes).


AFAIK getting a US tax credit equal to your foreign income tax bill is part of standard IRS rules and applies to all foreign income without the need for any treaty.


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