Tax Amnesty for Multinationals Expected to Spur $100 Billion

U.S. companies are being offered the chance to repatriate overseas earnings and many are jumping at the chance to bring revenue back into this country at a 5.25 percent tax rate, rather than the usual 20 to 25 percent rate, Financial Times reported.

The tax amnesty program will be offered to multinational corporations over the next few months and is expected to generate $100 billion in foreign exchange earnings thanks to a better take-up response by companies than had been expected.

The amnesty was authorized through tax breaks in the contentious American Jobs Creation Act and the robust participation is expected to give a noticeable boost to the dollar, Financial Times reported.

Greg Anderson, a currency strategist at ABN Amro in Chicago told Financial Times, “All else being equal, $100 billion is equivalent to a 5 percent rise in the dollar's trade-weighted index. The U.S. trade deficit is probably $600 billion in 2005, so this flow will be financing a sixth of the deficit all by itself.”

Among those taking advantage of the program are four pharmaceutical giants-Johnson & Johnson, Eli Lilly, Schering-Plough and Bristol-Myers Squibb, who committed to a combined repatriation of $37.4 billion. Pfizer has indicated it hopes to return an additional $37.6 billion held offshore, Financial Times reported.

The combined total of just the pharmaceutical companies represents more than half the $135 billion in earnings made overseas that officials were expecting to see repatriated across the U.S. economy when the law was passed last October. It is estimated that more than $700 billion in taxable U.S. earnings is sitting in offshore bank accounts and investments, in an effort to maintain lower tax rates.

While the amnesty program will be good for U.S. coffers and will serve as a boost for the flagging dollar, the 5.25 percent charge will affect quarterly earnings for some participating companies. The four participating drug companies saw an 83 percent drop in profits last week, Financial Times reported.

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