Firms want tax break to return funds from abroad

6/23/2011

Some of the nation's largest corporations have amassed vast profits outside the country and are pressing Congress and the Obama Administration for a tax break to bring the money home.

Apple Inc. has $12 billion waiting offshore, Google Inc. has $17 billion, and Microsoft Corp., $29 billion.

Under the proposal, known as a repatriation holiday, the federal income tax owed on such profits returned to the United States would fall to 5.25 percent for one year, from 35 percent. In the short term, the measure could generate tens of billions in tax revenues as companies transfer money that would otherwise remain abroad, and it could help ease the huge federal budget deficit.

Corporations and their lobbyists say the tax break could resuscitate the gasping recovery by inducing multinational corporations to inject $1 trillion or more into the economy, and they promoted the proposal as "the next stimulus" at a conference last week.

"For every billion dollars that we invest, that creates 15,000 to 20,0000 jobs either directly or indirectly," said Jim Rogers, chief executive of Duke Energy, at the conference. Duke has $1.3 billion in profits held overseas that it could bring back.

But that's not how it worked last time.

Congress and the Bush administration offered companies a similar tax incentive, in 2005, in hopes of spurring domestic hiring and investment, and 800 took advantage.

Though the tax break lured them into bringing $312 billion back to the United States, 92 percent of that money was returned to shareholders in the form of dividends and stock buybacks, according to a study by the nonpartisan National Bureau of Economic Research.

This money comes from overseas operations and in some cases accounting maneuvers that shift domestic profits to low-tax countries.

The study concluded that the program "did not increase domestic investment, employment, or research and development."

Indeed, 60 percent of the benefits went to just 15 of the largest U.S. multinational companies -- many of which laid off domestic workers, closed plants, and shifted even more of their profits and resources abroad in hopes of cashing in on the next repatriation holiday.

Merck, the pharmaceutical giant based in Whitehouse Station, N.J., was one of those big winners. It brought home $15.9 billion, second overall to Pfizer's $37 billion. It used the money for "U.S.-based research and development spending, capital investments in U.S. plants, and salaries and wages for the U.S.," said a Merck spokesman.

According to regulatory filings, though, the company cut its work force and capital spending in this country in the three years that followed.

Instead of adding domestic plants and employees, Merck used the cash infusion to continue paying dividends and buying back stock for the benefit of shareholders and executives -- even as the company was rocked by more than $8 billion in costs to settle a variety of disputes after executive missteps. Merck had to pay billions in back taxes to the IRS; billions more to consumers suing because of the dangerous side effects of the company's painkiller Vioxx, and hundreds of millions to the Justice Department, which had accused the company of defrauding Medicare.

The tax break, part of the American Job Creation Act, lacked safeguards to ensure the companies used the money for investment and job creation in the United States, as Congress intended.

The WIN America coalition, a multimillion-dollar campaign underwritten by dozens of global businesses, counters that many companies such as Cisco, Adobe, and Qualcomm used some of the repatriated money to hire thousands of workers.

The group contends another tax holiday would bring even more jobs now. Doug Thornell, an adviser to WIN America, cites a 2008 study commissioned by the corporations suggesting that it could spur 450,000 new jobs.

The tax break did provide the Treasury with a quick shot in the arm. When Merck brought its $15.9 billion back, it had to pay $731 million to the IRS. All told, companies brought back $312 billion in 2005 and paid $16 billion in taxes.

The prospect of profitable corporations getting a break as social programs are being cut has aroused tax protesters and labor organizations such as the Service Employees International Union, which say it would reward companies for moving jobs and investment overseas.