Corporations Gear-Up for Windfall Tax Break

Many U.S. corporations with overseas operations are busy announcing plans to participate in the repatriation amnesty program that is part of the American Jobs Creation Act (AJCA) signed into law last fall. The New York Times reports that pharmaceutical companies in particular are expected to make up a large percentage of the money flowing back into the states under the terms of this legislation. Pfizer alone, producer of popular drugs Viagra and Lipitor, is expected to repatriate as much as $38 billion in foreign profits. Four other pharmaceutical companies have announced plans to bring a total of $37 billion back to the U.S. ["Hitting the Tax-Break Jackpot," The New York Times, January 31, 2005]

The tax break portion of the AJCA is designed to encourage American companies to return to our shores the profits that they have been harboring in other countries. In so doing, the companies that participate in this program will incur a 5.25 percent tax in lieu of the 35 percent the company would normally pay on foreign profits. Without the AJCA, the law states that companies repatriating profits must make up the difference between the foreign tax on the profits and the U.S. rate of 35 percent when bringing the profits back into this country. AJCA allows a one-time tax break for companies that meet certain requirements in repatriating money. Those requirements include a "domestic reinvestment plan" and a promise that the profits won't be used to pay dividends to stockholders or repurchase company stock.

AJCA dissidents have argued that participating companies might bring foreign profits back into the U.S. under the auspices of the plan, take advantage of the reduced tax rate, and simply shift money that was already budgeted for plan-approved expenditures into non-plan approved directions. "Money is fungible," said Robert S. McIntyre of the Citizens for Tax Justice. "You take it from one pot, and you put it in another." Others who have voiced concern for the plan argue that large corporations may use the repatriated money to complete mergers with other corporations, and mergers often lead to reductions in workforce.

Others contend that as long as the money is returned to the United States, there's no harm, no foul in terms of how the money is used. Senator John Ensign (R-NV), one of the plan sponsors, contends that the money will provide a source for new domestic investment and suggests that hundreds of thousands of new jobs may be created as a result of the AJCA corporate tax break. Currency strategists have indicated that the repatriation may have measurable positive ramifications on the value of the dollar.

Hewlett-Packard, Johnson & Johnson, Schering-Plough, Kellogg, Procter & Gamble are some of the other giant corporations that are expected to bring billions back into the states. All told, as much as $400 billion in overseas profits may be returned to the U.S. in the next year, with a federal income tax price tag of $21 billion.

Related stories:

Tax Amnesty for Multinationals Expected to Spur $100 Billion

Treasury, IRS Announce Guidance on Repatriation of Foreign Earnings

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