Repatriation tax holidays
A repatriation tax holiday (also: “tax repatriation holiday” or “repatriated tax break”) is a one-time tax-break that allows multinational corporations to repatriate (“remit”) 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. Repatriation tax holidays are typically implemented for a time period of one tax year, often during periods in which economies are particularly in need of jobs, investment, or tax revenues (e.g., recessions), and may include partial or full tax exemption of foreign earnings.
- Goal: Increase the amount of business investment
- Goal: Increase the rate of job creation
- Goal: Increase the funding available for government capital projects
- Goal: Increase the funding available for government operations
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 of implementing this policy may include:
- Encouraging multinational corporations to keep foreign earnings abroad by raising expectations of future repatriation tax holidays and therefore reducing collected tax receipts over the long-term. The repatriated earnings could be returned to the country at a later stage at a higher tax-rate.
- Rewarding bad actors, as corporations that have most successfully hoarded their profits in overseas tax havens are the largest winners from this tax policy.
- Delays policy action that would convert the “worldwide” tax system that taxes income U.S. based multinationals corporations earn abroad into a residence based system that other OECD countries follow.
- Increased regulatory and compliance costs for government to monitor repatriated income spending.
- Failing to fulfill the goal of stimulating economic growth, as repatriated funds might simply free up money that would have been invested and created jobs anyways.
If answered yes, the following questions indicate superior conditions under which the policy is more likely to be appropriate:
- Is the income that is earned abroad by domestic corporations taxed only upon its remittance back into the country (tax deferral)?
- Is the home economy in acute need for revenue, jobs, or investment (e.g., distressed or in recession)?
- Is the tax holiday implemented as part of a broader tax reform that will prevent the need for future tax holidays?
- Will the market truly perceive this tax holiday as a one-time action (as opposed to raising expectations of future holidays)?
- Is it unlikely that alternative policies exist that could be used to stimulate income repatriation more efficiently?
The following questions should be considered when determining how to implement this policy:
- What restrictions, if any, should apply to the amount of income eligible for tax-advantaged repatriation?
- What restrictions, if any, should be placed on how repatriated income must be spent (e.g., on job-creating capital investments)?
- If investment restrictions exist, what supervisory mechanisms, if any, should be implemented that ensure the proper investment of repatriated funds?
- What industry or company types, if any, should be deemed ineligible for the repatriated income tax benefits?
- What mechanism, if any, should be included to discourage companies in the future to keep profits abroad?
- Has adoption of: Limited.
As of fall 2015, the United States is the only major developed economy that 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 repatriation tax 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. 
- For governance level(s): National
- For area type(s): Urban
- For issue type(s): Democracy, Efficiency, Finance
- Notable entities who have implemented or adopted this policy include:
- Associations - Technology. Assumption: Technology companies are amongst the largest beneficiaries of repatriation tax 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. 
- Associations - Pharmaceutical. Assumption: The assumptions are the same as for the technology sector.
- Advocates - Progressive Taxation. Assumption: A repatriation tax 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 repatriation tax 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. 
- Government Agencies - Departments of Budgets. Assumption: The CBO ranked repatriation tax holidays last in job stimulating policies as it has high budgetary implications and very little positive effect on the economy 
- Gruber, Jonathan. (2011). “Public Finance and Public Policy.” Chapter 24. Worth Publishers. New York, NY.
- A Repatriation Holiday Would Not Create Jobs. (2013) The Heritage Foundation. October 31, 2013. Article examining the repatriation tax holiday as backward looking, and concludes that US should move towards a territorial tax system.
- Examining Investor Expectations Concerning Tax Savings on the Repatriations of Foreign Earnings under the American Jobs Creation Act of 2004. Oler, Mitchell, Shevlin, Terry and Wilson, Ryan. (2007). Journal of the American Taxation Association. Vol 29(2). pp. 25-55. A study on the impact that the repatriation tax holiday legislation has on a firm’s decision to either repatriate or reinvest foreign earnings from abroad.
- Tax Cuts on Repatriation Earnings as Economic Stimulus: An Economic Analysis. Marples, Donald J. and Gravelle, Jane G. (2011) Congressional Research Service. June 19, 2014. This study examines the economic impact of a tax cut on repatriated earnings and concludes that the stimulus effect is larger if funds increase current investment.
- Repatriation Tax Holiday Would Lose Revenue And Is a Proven Policy Failure. Marr, Chuck and Huang, Chye-Ching. (2014) Center on Budget and Policy Priorities
- Report: Repatriation Tax Holiday a 'Failed' Policy. Peterson, Kristina. (2011) Wall Street Journal
- Why a Permanent Repatriation Holiday, Rather Than a Temporary Fix, Is Prudent Policy. Logan, David. (2011) Tax Foundation
- 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
- 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
- . 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.