Foreign Profits Taxed at a Fraction of the Normal Rate

Somewhere in the American Jobs Creation Act signed by President Bush last October is a corporate tax break allowing companies to pay only a fraction of the taxes they would normally owe for returning profits to the U.S. from international havens. Any company with profits in another country can take advantage of the one-year window during which profits brought in to the U.S. will be taxed at a 5.25 percent tax rate rather than the standard 35 percent tax rate.

The break is intended to create jobs in the U.S. Critics however, say that the number of actual jobs created will be insignificant especially compared to the loss of tax revenues. Chris Senyek, an accounting analyst at Bear Stearns, told the New York Times “companies could easily work around provisions in the law intended to stop them from using the money for dividends to shareholders rather than new hiring.”

The government can challenge how companies allocate profits internally. In the past, companies have been able to prevail against the IRS in such challenges.

“There’s a limit to what they [tax authorities] can do,” H. David Rosenbloom, director for the international tax program at New York University Law School told the Times, “because these cases are huge.”

Among the biggest beneficiaries of this tax break are drug companies. According to the Times, four of the big six pharmaceutical companies have announced plans to return $56 billion in profits to the U.S. The remaining two firms are expected to return an additional $18 billion. At the same time these funds are flowing in, one of the firms, Pfizer, has announced plans to cut annual costs by $4 billion over the next three years. Although no plans to eliminate jobs have been announced, analysts expect Pfizer’s workforce to shirk by thousands.

It is to companies’ advantage to return profits to the U.S. during the year-long window. They can spend it at home rather than overseas as the tax laws require. Much of the money now returning to the U.S. comes from years of exploiting loopholes in the American tax code to shelter profits in foreign countries to protect them from U.S. taxes. After the window closes, companies will go back to stockpiling profits in international tax havens until the next break comes along.

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