Tax Windfall Possible for Tech, Drug Companies

Technology firms and pharmaceutical companies would win huge tax breaks under a bill that would permit them to bring home profits earned abroad without the heavy tax burden that goes with it.

The bill would allow American companies with foreign operations to "repatriate" earnings held overseas at a tax rate of 5.25 percent, versus the current rate of 35 percent, the Wall Street Journal reported. The current tax rate is a strong disincentive for companies to bring foreign earnings into the U.S.

Robert Willens, tax and accounting analyst at Lehman Brothers, said the bill would be a windfall for companies. "I can't recall something like this ever happening before, where companies were able to tap into this great source of resources on such a low-cost basis."

One big winner, for example, would be Pfizer Inc., with $38 billion in foreign earnings that would be eligible for the lower tax rate. According to J.P. Morgan Chase Bank, a total of about $650 billion is available for repatriation if the legislation is enacted.

The money would have to be reinvested in U.S. businesses within 12 months after the bill’s passage. Some companies already have some ideas of how to spend the extra money.

At H-P, based in Palo Alto, Calif., "Debt reduction is likely to be used in terms of strengthening our balance sheet, but beyond that we're in an evaluation process," said Dan Kostenbauder, vice president of transaction taxes. "We have a good general sense" about what the company would do with the additional cash, but "at the end of the day you need to know exactly what the rules are going to be and when" the law would be enacted, he told the Journal.

Critics of repatriation include tax experts and Treasury Department officials who say it rewards companies that have hidden money in tax havens. They say many companies repatriate income every year and pay much steeper tax bills.

Not all companies would bring foreign cash back. The repatriation of foreign earnings "wouldn't be something we'd take a huge amount of advantage of," said Peter Stack, a spokesman for General Electric Co., based in Fairfield, Conn. "There's plenty of opportunity for those earnings to be creatively and constructively deployed" in the various countries in which the company does business, he said.

Slightly more than half of 28 large companies surveyed by J.P. Morgan Chase Bank, however, said they would repatriate substantially all of their overseas earnings. Of those companies, 46 percent would use the money to reduce debt, and nearly 40 percent would use it on capital spending, research and development, and acquisitions.

The repatriation provision—part of a broader tax bill centering on repeal of an export-tax break—would bring in about $2.8 billion to the Treasury during the first year.

The Senate has already passed the bill, but the House of Representatives is more divided. A final compromise could take weeks or even months.

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