Difference between revisions of "Repatriation tax holidays"

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A tax repatriation holiday (also: “repatriation tax holiday” or “repatriated tax break”) is a one-time tax-break that allows multinational corporations to repatriate income earned abroad back to their home country at a discounted tax rate. The underlying theory is that multinational corporations will not transfer income back to the country, in which their headquarters are located, if the income earned abroad will be taxed at a higher domestic tax rate than the foreign tax rate. Therefore, a tax repatriation holiday serves as an incentive to multinational corporations to invest the money in their home economy rather than keeping it abroad.


CONCEPT


Goals
Example

As a result of a tax provision that allows corporations to defer tax payments on income earned abroad until they are repatriated, a national government is forgoing a major share of tax revenues and investments in its economy. It, therefore, decides to offer corporations a one-year window in which they can repatriate any profits earned abroad at a discounted tax rate. However, the government mandates that repatriated income can only be spent on job creating investment, and not on dividend payments, stock repurchases, or executive compensation. As a result, the country sees money being invested in its economy and increased tax revenues, which it uses to fund an ambitious infrastructure overhaul. project.

Tradeoffs

Tradeoffs of implementing this policy may include:

  1. Encouraging multinational corporations to keep foreign earnings abroad by raising expectations of future tax repatriation holidays and therefore causing long-term revenue short-fall.
  2. Rewarding those corporations who have most successfully hoarded their profits in overseas tax havens.
  3. Not fixing the uncompetitive “worldwide” tax system that taxes the income U.S. based multinationals corporations earn abroad.
  4. Creating difficulty in monitoring how companies spend repatriated funds.
  5. Not stimulating the economy, as repatriated funds might simply free up money that would have been invested and created jobs anyways.
  6. Missing opportunities, as some of the repatriated earnings could be returned to the country at a later stage at a higher tax-rate.
Compatibility Assessment

If answered yes, the following questions indicate superior conditions under which the policy is more likely to be appropriate:

  1. Is the income that is earned abroad by domestic corporations taxed only upon its remittance back into the country (tax deferral)?
  2. Is the policy accompanied by a tax reform that will prevent the need for future tax holidays?
  3. Does the policy limit the use of repatriated funds to investment activities leading to economic and job growth?
  4. Can repatriated funds be supervised properly to monitor their investment in economic stimulus activities?
  5. Can tax reduction rate be tied to an increase in economic activity (such as job growth for instance)?
Design

The following questions should be considered when determining how to implement this policy:

  1. Will there be a cap for repatriation?
  2. What will be the maximum deduction?
  3. What will be the tax reduction?
  4. Can the tax reduction be flexible and adjusted to certain parameters?
  5. Who will be the prime beneficiaries of the policy, can alternative policies be taken to repatriate income from these corporations?


ADOPTION


PolicyGraphics

As of fall 2015, only the United States has adopted a one-time “dividend repatriation tax holiday” as part of the American Jobs Creation Act of 2004. According to the U.S. tax code, U.S. based companies do not have to pay taxes on income earned abroad through its subsidiaries until these are remitted to the United States. In addition, in order to avoid double-taxation, companies are given tax credits for taxes paid abroad. The tax repatriation holiday reduced the rate of repatriated foreign income to 5.25%, down from the statutory 35% corporate tax rate. In addition, companies had to adopt domestic investment plans that committed to expand operations in the United States, boosting capital spending, economic growth, and job creation for qualifying repatriations. [1]

Adopters


STAKEHOLDERS


Supporters
  • Associations - Technology. Assumption: Technology companies are amongst the largest beneficiaries of tax repatriation holidays, as they rely on intellectual property for their profits, which makes it very easy to shift production to countries with lower corporate tax rates. Almost half of the repatriations in the 2004 US tax holiday came from companies in the technology and pharmaceutical industries. [3]
  • Associations - Pharmaceutical. Assumption: The assumptions are the same as for the technology sector.
Opponents
  • Advocates - Progressive Taxation. Assumption: A tax repatriation holiday is very regressive tax policy, as it gives preference to large, profitable multinational corporations that earn income abroad and are able to keep it there for a prolonged period of time. Advocates for progressive taxation would support some form of a restricted tax repatriation holiday (such as a compulsory “transition tax” proposed by President Obama in 2015) as part of a tax reform plan that would make international income of US companies taxable regardless of its remittance. [4]
  • Government Agencies - Departments of Budgets. Assumption: The CBO ranked repatriation ta holidays last in job stimulating policies as it has high budgetary implications and very little positive effect on the economy [5]


REFERENCES


Research
Resources
Footnotes
  1. Marples, Donald, and Gravelle, Jane. “Tax Cuts on Repatriation Earnings as Economic Stimulus: An Economic Analysis.” Congressional Research Service, May 27, 2011. http://www.ctj.org/pdf/crs_repatriationholiday.pdf
  2. Browning, Lynnley. ”One-time tax break saved 843 U.S. corporations $265 billion.” The New York Times, June 24, 2008. http://www.nytimes.com/2008/06/24/business/worldbusiness/24iht-24tax.13933715.html?_r=0
  3. Marr, Chuck and Huang, Chye-Ching. “Repatriation Tax Holiday Would Lose Revenue And Is a Proven Policy Failure.” Center on Budget and Policy Priorities, June 19, 2014. http://www.cbpp.org//sites/default/files/atoms/files/6-19-14tax.pdf
  4. Marr, Chuck and Huang, Chye-Ching. “Repatriation Tax Holiday Would Lose Revenue And Is a Proven Policy Failure.” Center on Budget and Policy Priorities, June 19, 2014. http://www.cbpp.org//sites/default/files/atoms/files/6-19-14tax.pdf
  5. Marr, Chuck. “Corporate Tax Holiday Has No Place on Payroll Tax-Cut Extension Bill.” Center on Budget and Policy Priorities, December 8 2011. http://www.cbpp.org/blog/corporate-tax-holiday-has-no-place-on-payroll-tax-cut-extension-bill.
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