In November, Pfizer announced plans to acquire Allergan for $160 billion, which would create the world’s largest drug company while shifting Pfizer’s headquarters to Ireland, a popular low-tax country for corporations looking to slash their U.S. tax bills.
This type of strategic reincorporation, known as a corporate inversion, is commonplace among American multinational companies that are trying to escape the 35 percent U.S. corporate income tax on worldwide income, the highest corporate tax rate in the developed world. According to recent data from Bloomberg, American multinationals are currently holding approximately $2 trillion in profits overseas.
This stockpile of foreign profits is a hot-button issue that is being debated by U.S. lawmakers right now. President Obama recently proposed a tax-overhaul mandate that would require “a 14 percent mandatory tax on the stockpiled profits and a 19 percent minimum tax on foreign earnings going forward.” If approved, it would yield approximately $268 billion for the U.S. over the next six years.
In considering on which side one might fall in the debate, it is important to weigh the benefits versus the challenges associated with implementing a one-time tax policy on repatriation. Knowing the significant amount of untapped capital legally sitting on the sidelines overseas, what would it take to encourage U.S. corporations to bring those profits back to the U.S., effectively foregoing shareholder value?
Perhaps looking at what other countries have done and their success is also important to note when the government considers this issue.
In Italy last year, a voluntary tax-repatriation program was put into place that aimed to return undeclared profits to the country, which totaled approximately 60 billion euros. When instituted, the program generated 4 billion euros in taxes and penalties, less than 10 percent of expectation.
In Russia, two new laws were recently enacted to help stimulate the domestic economy through taxing offshore profits, both of which revolve around the implementation of voluntary tax-declaration programs and both of which are expected to yield very little income for the state. For lawmakers in these countries, as well as in the U.S., the temptation to bring in potential offshore profits is driven by the vast amount of foreign income that is sitting in tax-haven countries abroad, which could be injected into domestic economies to stimulate growth, ease debt and create jobs.
For U.S. corporations specifically, when it comes down to corporate tax reform, and in particular tax repatriation, public companies have to meet market expectations, and thus have a duty to their shareholders. Oftentimes the benefits to the homeland of tax repatriation are overshadowed by the need to increase shareholder value. For this type of regulatory reform to work, the real question to answer will be is love of country worth ignoring shareholder value and profits?
The rationale behind a tax-repatriation holiday is to provide the incentive of a lower tax rate so that multinationals bring a higher volume of foreign earnings back to the U.S. A tax reprieve can help American-based companies to maintain a competitive stance in a global market that includes foreign companies without the same tax burdens.
A tax repatriation holiday can work, because if American multinationals are able to keep more of their earnings, they can use that capital to scale their U.S.-based operations, create American jobs and, hopefully, drive revenues. It will be the companies’ responsibility to effectively communicate to their shareholders that this one-time tax can support future operations.