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Tax Attorney Comments on Repatriation Incentives in JOBS Act

APR. 9, 2004

Tax Attorney Comments on Repatriation Incentives in JOBS Act

DATED APR. 9, 2004
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April 9, 2004

 

The Honorable Charles E. Grassley, Chairman

 

Senate Finance Committee

 

Washington, DC 20510

 

 

The Honorable Max Baucus, Ranking Member

 

Senate Finance Committee

 

Washington, DC 20510

 

 

The Honorable William M. Thomas, Chairman

 

House Ways & Means Committee

 

Washington, DC 20515

 

 

The Honorable Charles B. Rangel, Ranking Member

 

House Ways & Means Committee

 

Washington, DC 20515

 

 

Re: Repatriation of Earnings from CFC's -- Section 231 of S. 1637

Dear Chairmen and Ranking Members

[1] I am writing in support of S. 1637, the Jumpstart our Business Strength (JOBS) Act, and, particularly, section 231 (Toll Tax on Excess Qualified Foreign Distribution Amount).

[2] Virtually all public discussion relating to taxation of offshore earnings has been based on the premise that U.S. corporations repatriating profits from controlled foreign corporations (CFC's) will be subject to a residual U.S. tax equal to 35% of the dividend (including amounts under section 78 of the Internal Revenue Code) less any foreign taxes attributable to the dividend. This assumption in turn supports the conclusion that deferral of U.S. tax is the prime motivator for not repatriating CFC profits to the U.S. This is simplistic, incorrect, and not a sound basis for establishing tax policy.

[3] The U.S. tax policy of limited capital export neutrality deviates from the pure economic norm in that it prohibits a credit for foreign income taxes against U.S. taxes on U.S. source income (implemented through the foreign tax credit limitation rules of section 904 of the Code). The result is a clear lack of capital export neutrality. The codification of this unbalanced policy has for forty-two years provided a one-way filter, allowing U.S. investment capital to flow offshore while creating a disincentive to return the fruits of these foreign investments for use in the U.S. economy.

[4] The timing of dividends from foreign corporations is undoubtedly influenced in some cases by loss of a tax deferral, as well as by the objective of cross-crediting foreign taxes on income from various foreign sources (necessary because income from U.S. sources may not be used in determining the foreign tax credit limitation). However, an equally important consideration is economic double taxation from losing foreign tax credits associated with the repatriation.

[5] This double taxation results from several factors, the two most significant of which are: 1) many mature U.S. companies have experienced domestic operating difficulties, creating an "overall domestic loss" that permanently offsets foreign source income and renders the foreign tax credit useless; and 2) a number of large enterprises have an artificially reduced foreign tax credit limitation, or even a sizeable "overall foreign loss" account balance, often as a result of the current rules governing the apportionment of interest expense to foreign source income. A corporate tax adviser would strongly discourage repatriation in either case, thereby blocking the income offshore for reasons other than "tax deferral".

[6] Section 204 of S.1637 addresses the overall domestic loss issue and section 205 addresses the interest expense apportionment rules. Without opining on the adequacy of either provision, and recognizing that the effective dates have an impact on revenue estimates, I submit that the proposed effective dates of 2007 and 2009 respectively do nothing to encourage repatriations of income from operations of taxpayers in the past or even of income from current operations, leaving the repatriation barrier firmly in place.

[7] There is undoubtedly a considerable amount of earnings and equivalent cash blocked offshore that will not be returned to the U.S. economy without a change in these rules. Based on personal observations with my own clients and other anecdotal evidence, I believe that published estimates of approximately $400 billion available for repatriation are conservative by a very considerable margin.

[8] Sections 204 and 205 of S. 1637 are a good start toward reducing on a prospective albeit delayed basis the foreign tax credit impediment to repatriating future earnings of CFCs. However, provisions along the line of those in section 231 must be the cornerstone of any effort to rectify the consequences of the current policy and encourage immediate cash repatriation of past earnings.

[9] For the record, I am a tax lawyer and member of the faculty of the Graduate Tax Program at Boston University School of Law. I have practiced and taught for many years in the field of international taxation.

Sincerely

 

cc:

 

Mark Prater, Majority Chief Tax Counsel, SFC

 

Patrick G. Heck, Minority Chief Tax Counsel, SFC

 

Robert Winters, Majority Chief Tax Counsel, HW&MC

 

John Buckley, Minority Chief Tax Counsel, HW&MC

 

George K. Yin, Chief of Staff, Joint Committee on Taxation

 

Brainard L. Patton

 

Counselor at Law
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