U.S. Companies May Receive Tax Windfall
On Wednesday, the Senate Finance Committee approved a bill that would provide a reduced tax rate on income that has been held overseas. Analysts say it is likely the bill will become law.
This proposed legislation is yet another attempt on the part of our legislators to replace the U.S. export credit that has been available to U.S. companies that sell their products abroad. The World Trade Organization (WTO) gave the U.S. a deadline of October 1 for discontinuing that credit, or face sanctions of as much as $4 billion.
Congress is scrambling to stave off the sanctions, scheduled to begin in January. The bill now headed for the Senate floor would provide a one-time 5.25% income tax on foreign profits earned by U.S. companies. Under current law, the profits are not taxed in this country as long as the money is not brought into this country.
Besides averting sanctions, legislators see this tax windfall as an opportunity to boost the U.S. economy with hundreds of billions of dollars currently invested overseas. Large manufacturers including Hewlett-Packard, Eli Lilly, Merck, Intel, Sun Microsystems, and Dell Computer would benefit the most from the unusually low tax rate. Hewlett-Packard claims to have $14.5 billion in foreign earnings, Eli Lilly has $8 billion, and the list continues.
The tax break would provide a six-month window of opportunity during which companies could repatriate their overseas earnings at the unusually low tax rate. The bill would not impose a drain on government coffers, since the lower tax rate would, for the most part, replace other tax benefits, primarily the foreign tax credit that has raised the ire of the WTO.