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.

You may like these other stories...

Truckers and other owners of heavy highway vehicles take note: Your next federal highway use tax return is due on September 2.The September 2 due date, which was pushed back two days because the normal August 31 deadline...
The head of the IRS has a message for taxpayers and tax preparers who have endured long wait times while on the phone with the tax agency: Call your member of Congress.During his keynote speech at the 69th Annual Meeting of...
Regulators struggle with conflicts in credit ratings and auditsThe Public Company Accounting Oversight Board (PCAOB), which was created by the Sarbanes-Oxley Act in 2002, released its third annual report on audits of...

Already a member? log in here.

Upcoming CPE Webinars

Aug 26
This webcast will include discussions of recently issued, commonly-applicable Accounting Standards Updates for non-public, non-governmental entities.
Aug 28
Excel spreadsheets are often akin to the American Wild West, where users can input anything they want into any worksheet cell. Excel's Data Validation feature allows you to restrict user inputs to selected choices, but there are many nuances to the feature that often trip users up.
Sep 9
In this session we'll discuss the types of technologies and their uses in a small accounting firm office.
Sep 11
This webcast will include discussions of commonly-applicable Clarified Auditing Standards for audits of non-public, non-governmental entities.