Tax Reform: Repatriation of Foreign Earnings

Tax Reform: Repatriation of Foreign Earnings

link to page 1

Updated December 4, 2017
Tax Reform: Repatriation of Foreign Earnings
A 2016 report released by the U.S. Public Interest Research
United States in a firm’s books of accounts certified before
Group, Citizens for Tax Justice, and the Institute on
June 30, 2003.
Taxation and Economic Policy estimated that Fortune 500
companies held nearly $2.5 trillion in accumulated profits
According to an IRS study of the provision, 843 of the
offshore for tax purposes. Taxing these offshore profits has
roughly 9,700 eligible corporations took advantage of the
been discussed as a means to pay for several policy goals—
deduction. This sub-set of eligible corporations repatriated
including infrastructure investment and lowering corporate
$312 billion in qualified earnings and created total
statutory rates.
deductions of $265 billion. Using the most recent year of
data available, the data suggest that approximately one-third
Brief Summary of Current Law
of all offshore earnings were repatriated in the tax year after
The United States bases its jurisdiction to tax international
enactment.
income on residence. As a result, U.S.-chartered
corporations are taxed on their worldwide income, but
The same IRS study also provided information on the
foreign corporations are taxed only on their U.S.-source
recipients. The benefits of the repatriation provision are not
income. Accordingly, a U.S. firm with overseas operations
evenly spread across industries. The pharmaceutical and
can indefinitely postpone paying its U.S. tax on its foreign
medicine industry accounted for $99 billion in repatriations
income by operating through a foreign subsidiary. Using
or 32% of the total. The computer and electronic equipment
the same principle, U.S. taxes are deferred as long as the
industry accounted for $58 billion or 18% of the total. Thus,
firm’s foreign earnings remain in the control of its foreign
these two industries accounted for half of the repatriations.
subsidiary and are reinvested abroad. The U.S. firm pays
Most of the dividends were repatriated from low tax
taxes on its overseas earnings only when they are paid to
countries or tax havens.
the U.S. parent corporation as intra-firm dividends or other
income.
As shown in Figure 1, the accumulation of funds that could
be repatriated since the 2004 repatriation holiday has been
Another prominent feature of the U.S. tax system is the
concentrated in the health care and information technology
foreign tax credit. The foreign tax credit is designed to
industries. Together these industries account for over 50%
alleviate double taxation where U.S. and foreign
of the total funds overseas according to a Credit Suisse
governments’ tax jurisdictions overlap—that is, the U.S.
report.
firm pays taxes at the higher of the U.S. or foreign tax rate.
With respect to repatriated dividends, U.S. firms can claim
Figure 1. Permanently Reinvested Foreign Earnings,
foreign tax credits for foreign taxes paid by their
2005-2015
subsidiaries on the earnings used to pay the repatriated
dividends. The ability to defer U.S. tax, thus, poses an
incentive for U.S. firms to invest abroad in countries with
low tax rates. Proposals to cut taxes on repatriations are
based on the premise that even this deferred tax on intra-
firm dividends discourages repatriations and encourages
firms to reinvest foreign earnings abroad and that a cut in
the tax would stimulate repatriations.
Repatriation Holiday in the American Jobs
Creation Act
The American Jobs Creation Act (P.L. 108-357) permitted a
deduction equal to 85% of the increase in foreign-source
earnings repatriated. For a firm paying taxes at the 35%
corporate tax rate, this reduced the tax rate on repatriated

earnings to the equivalent of 5.25%. Credits for foreign
Source: David Zion et al., Parking Lots of Cash and Earnings Overseas,
taxes paid were reduced by a corresponding amount.
Credit Suisse Equity Research, March 11, 2016.
The act required firms to adopt domestic investment plans
Selected Proposals
for qualifying repatriations and limited the maximum
Stand-Alone Voluntary Proposals: Proposals were made
deduction allowed. The maximum allowable deduction was
in the 114th Congress that would have provided
set equal to the greater of $500 million or the amount of
corporations the option to voluntarily repatriate previously
earnings shown to be permanently reinvested outside the
untaxed earnings; apply reduced tax rates to these
repatriations; and use the tax revenue to fund infrastructure
https://crsreports.congress.gov

Tax Reform: Repatriation of Foreign Earnings
investment (S. 981), replenish the Highway Trust Fund
examination of the American Jobs Creation Act suggests
(H.R. 625), reduce the national debt (H.R. 2225), or for
any short-term stimulus would be limited. According to the
other purposes (H.R. 3083 and H.R. 5158).
CBO, an upper-bound estimate suggests a stimulus effect of
40 cents of GDP per tax dollar not received. This upper-
Mandatory Proposals as Part of Business Tax Reform:
bound estimate would be reduced to the extent that
The House- and Senate-passed versions of the “Tax Cuts
companies are not cash constrained and by flexible
and Jobs Act” would each impose a mandatory tax on
exchange rates.
deemed repatriations. The House-passed version would tax
cash or cash equivalents at 14% and illiquid assets at 7%.
A tax on repatriated earnings is also unlikely to
The Senate-passed version would apply rates of 14.5% and
significantly improve long-run economic growth. To see
7.5%, respectively, and recapture the benefits of the
why, remember that economic growth can arise from
reduced rates for any company that inverts within 10 years
growth in labor supply and/or growth in the capital stock.
of the bill’s enactment.
As a result, growth effects depend upon the degree that the
tax would alter firm’s decisions to hire employees and
Past proposals would have used a tax on unrepatriated
invest. However, a report from the Heritage Foundation
foreign earnings as part of the transition associated with
found that a
business tax reform. Both the Better Way (House
Republican plan) released in June 2016 and the Tax Reform
repatriation holiday would have little or no effect on
Act of 2014 (H.R. 1 in the 113th Congress) would have used
investment and job creation… simply because the
a mandatory or deemed tax on unrepatriated earnings to
repatriating companies are not capital-constrained
assist the transition to new tax systems which would not tax
today. Any investment, any action that they would
overseas corporate profits. Under both proposals, existing
deem worthwhile today can be and is being
unrepatriated earnings of U.S. firms’ foreign subsidiaries
financed by current and accumulated earnings.
held in cash would be taxed at 8.75% and other earnings at
3.5%. The liability for this one-time tax would be payable
Empirical analyses have found little to no discernible
over eight years.
economic effects from the provisions in the American Jobs
Creation Act. Studies using publicly available data
Budgetary and Economic Issues
sources—such as annual reports and press releases—to
Budgetary Issues: Voluntary repatriation proposals have
report the subsequent actions of participants in the
been scored by the Joint Committee on Taxation as
American Jobs Creation Act generally concluded that much
reducing federal revenue. This loss occurs because some of
of the repatriated earnings were used for cash-flow
the repatriated funds would have been repatriated normally
purposes and found little evidence that new investment was
within the budgetary window, but would have been taxed at
spurred. Similarly, empirical econometric studies found the
the statutory rate of 35%. Each repatriated dollar that fits in
repatriation provisions to be an ineffective means of
this category generates a revenue loss equal to the
increasing economic growth (for example see Dhammika
difference between the statutory and reduced tax rate.
Dharmapala, C. Fritz Foley and Kristin J. Forbes, 2011.
According to a 2014 Joint Committee on Taxation estimate,
“Watch What I Do, Not What I Say: The Unintended
a two-year repatriation holiday was estimated to reduce
Consequences of the Homeland Investment Act,” Journal of
federal revenue by $95 billion over 10 years. Voluntary
Finance, American Finance Association, vol. 66(3) and
holidays also may reduce revenue as they produce an
Mitchell A. Petersen and Michael Faulkender, 2012,
incentive for companies to delay future repatriations in
Investment and Capital Constraints: Repatriations Under
anticipation of future repatriation holidays.
the American Jobs Creation Act, Review of Financial
Studies, 25(11)).
Deemed repatriation proposals may raise revenue
depending on how the provision is designed. Overseas
This In Focus is part of a series of short CRS products on
earnings can be broken into two categories: those held in
tax reform. For more information, congressional clients
cash and those physically reinvested in overseas plant and
may visit the “Taxes, Budget, & the Economy” Issue Area
equipment. According to Credit Suisse, the share held as
Page at www.crs.gov.
cash could be as high as 45%. As a result, it is unlikely a
deemed repatriation will raise significant revenue unless
Donald J. Marples, Specialist in Public Finance
physically reinvested earnings are also taxed.
IF10640
Economic Issues: Regardless of whether a tax on
repatriated earnings is voluntary or mandatory, an

https://crsreports.congress.gov

Tax Reform: Repatriation of Foreign Earnings

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.

https://crsreports.congress.gov | IF10640 · VERSION 4 · UPDATED