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Multinationalss push congress for hefty tax breaks

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Multinationals Push Congress for Hefty Tax Breaks

c.2003 Newhouse News Service

WASHINGTON -- If you had a tidy $526 million stashed in a savings account offshore, wouldn't you like to spend a little?

What if the cost of getting the money out was 35 cents on the dollar -- handed over to the IRS? Still worth it?

Apparently not, according to Nike, which has exactly that amount of profits from subsidiaries overseas. The same goes for a number of other companies that hold some $400 billion in such earnings offshore to defer paying U.S. taxes on them.

Now the companies want to bring some of that money home -- but only if Congress dramatically slashes the tax bite for doing so.

Nike has linked up with other multinationals, including an impressive roster of technology and pharmaceutical companies, in an all-out lobbying drive to cut the normal 35 percent tax rate on foreign earnings to a more digestible 5.25 percent.

Their rationale: Keeping all that cash overseas doesn't do the U.S. economy much good. Why not create an incentive to bring it back and create jobs here?

"Having that money invested in the United States at a time when we need economic stimulus I think is good policy," said Nike lobbyist Brad Figel, echoing an argument by others in the patriotically labeled "Homeland Investment Coalition" pushing the idea.

Critics derisively label the plan a tax "holiday" that fat multinationals don't need. They note that many of those who have deferred paying taxes on earnings overseas -- Nike, computer chipmaker Intel and drugmaker Eli Lilly among them -- have plenty of cash and profits.

"You look at how American companies are doing overseas -- they're doing terrific," said Michael McIntyre, an expert on international tax law at Wayne State University in Detroit. He said the proposal amounts to "rewarding tax evaders and avoiders."

Big sums are at stake for the companies, which would have several months to decide whether to take the one-time tax break.

Intel has accumulated some $6.3 billion in untaxed profits earned by foreign subsidiaries, according to its most recent annual report to the Securities and Exchange Commission. Hewlett-Packard has amassed $14.5 billion in such earnings.

Others in the coalition of 46 companies include Eli Lilly, with $8 billion in earnings; drugmaker Schering-Plough, $9.4 billion; Oracle, $3.1 billion; Sun Microsystems, $1.4 billion; and Texas Instruments, $1.3 billion.

Technology companies are front and center in the effort. The American Electronics Association pitches the plan as relief for the 560,000 industry layoffs the past three years and an answer to the economy's "jobless recovery."

Their pleas are finding sympathy on Capitol Hill, where the concept has bipartisan backing. The tax cut was included in an international tax bill approved this month by the Senate Finance Committee. House tax writers initially proposed a similar plan, but it's less clear whether it will survive in final legislative drafts.

The Senate and House bills aim at a broader rewrite of the U.S. regimen for taxing multinationals. The World Trade Organization has twice ruled that the system unfairly subsidizes U.S. exporters. Lawmakers hope to avoid a trade war with Europe, which is threatening $4 billion in retaliatory tariffs unless Congress eliminates the subsidy.

As things stand, American companies can indefinitely defer U.S. taxes on earnings of foreign subsidiaries if they consider those profits permanently invested overseas. "Repatriating" the earnings -- returning them to the parent company -- subjects them to the top corporate tax rate of 35 percent, less a credit for foreign taxes paid.

Faced with such a tax hit, companies have embraced deferral. A J.P. Morgan report said financial statements from the S&P 500 show $406 billion eligible for repatriation. Counting more companies could push that to $500 billion, the report said.

"It's a fairly simple decision. Right now we have a huge barrier, a wall if you will, about these dividends coming back in -- a 35 percent wall," said Nike's Figel.

Nike has branch offices and subsidiaries in 43 foreign countries. All the company's footwear is made overseas, with the biggest share -- 38 percent -- coming from China. The company's cumulative unrepatriated foreign profits have risen dramatically, to $526 million last year from $25 million in 2000.

In Intel's case, unrepatriated profits nearly tripled to $6.3 billion last year from $2.2 billion in 2000.

The J.P. Morgan report estimated that $300 billion would be repatriated out of eligible funds. Of that, about $100 billion could move into the economy over two years, the report said, enough to create 400,000 to 500,000 jobs.

J.P. Morgan found that 28 companies hold about a fourth of the unrepatriated profits. Most told J.P. Morgan they would use repatriated earnings for capital goods and research and development, but they also cited debt retirement, stock buybacks and dividends as uses.

Critics have seized on this level of flexibility, saying the legislation is so broadly written that companies can use the money for virtually anything that helps the bottom line, not just investments that directly create jobs.

"You could argue that share buybacks to fund stock options creates more economic stability -- how does that help?" said Greg Jenner, deputy assistant secretary for tax policy at Treasury. "This is just a bad idea on so many levels."

Treasury officials have been the most prominent critics of the plan, along with Sen. John Breaux, D-La., who unsuccessfully tried to restrict use of the money to capital investment, research and development, and pension plans.

Breaux and Treasury officials claim the tax break is unfair to manufacturers without foreign operations, or those who have dutifully repatriated their earnings and paid the full 35 percent corporate tax.

"Taxpayers who have been playing by the rules all along and bringing the money back take it in the chin," Jenner said.

Backers of the legislation are feeding off the larger debate about America's global competitiveness prompted by the WTO rulings.

Broadly, critics of the existing U.S. system of taxing worldwide income say it puts U.S. multinationals at a disadvantage with competitors in countries with a "territorial" system, in which foreign earnings aren't taxed. They say other countries also have been cutting tax rates to help native firms.

Tax experts on the other side of the argument say the U.S. system, with foreign tax credits and deferrals, already acts like a territorial system. Furthermore, they say the U.S. corporate tax burden has plummeted over the last 40 years.

As a share of gross domestic product, corporate tax revenues will fall to 1.2 percent in 2003, the Center for Budget and Policy Priorities said, citing estimates from the Congressional Budget Office. That's down from 4.1 percent in 1965.

Effective tax rates -- the percentage of profits paid in taxes, a measure that reflects the impact of various tax breaks -- also have declined. Since 1996, the effective rate has averaged 26.3 percent, or well below the top statutory rate of 35 percent, the center said.

McIntyre, the Wayne State University professor, is among those who worry that multinationals will be back in a few years asking Congress for another tax cut, creating an incentive to structure corporate finances so that even more profits pile up overseas.

Though Treasury officials have disparaged the tax cut, the Bush administration hasn't officially decided to oppose it, Jenner said.

"The administration has not been for every tax cut that comes rolling down the street," Jenner said. "This is a policy concern, and we do try to get the right policy."

Oct. 20, 2003

(Tom Detzel can be contacted at

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