The Simple Trick with Tax Repatriation

10/16/2017 12:37 pm ET
Sabrina the Unicorn from the <a rel="nofollow" href="" target="_blank">People’s Tax Page</a>
Sabrina the Unicorn from the People’s Tax Page

President Trump is promising to bring “trillions” of dollars back from overseas, where large multinational companies based in the United States are supposedly stashing it. Who could criticize that?

Indeed, it is hard to argue against the principle of having United States companies bring their money home to share with us all. It is the darned facts that get in the way.

Simply put, there are not trillions of dollars idly sitting overseas.

Let’s go through the basics of international tax planning, simply.

We start with an American company, such as Apple-US. If Apple-US were just Apple, a simple American company, it would be making billions if not trillions of dollars selling its phones and other products at home and world-wide. And Apple would be paying the top U.S. corporate tax rate, of 35%, on those billions of dollars, for billions of dollars in taxes.

Not surprisingly, Apple and its shareholders would not like that.

So Apple-US creates another company, Apple-not-US, and places it in a jurisdiction that charges little if any corporate taxes. Then Apple-US transfers its intellectual property rights -- patents, trademarks, and the like -- to Apple-not-US. Apple-US continues to make billions of dollars selling phones. But now Apple-US must pay licensing fees to Apple-not-US. How much? Well, as a first approximation, let’s say virtually all of the billions of dollars that Apple-US makes.

As a result of these fairly simple steps, Apple-US shows little if any profits: it has great revenues, from its sales, but also great expenses, from the licensing fees.

Meantime, Apple-not-US shows profit of billions -- tax-free, given its happy tax haven home. The money is invested, in world-wide markets.

Apple-US could bring this money “home,” but it would have to pay 35% of it to the U.S. federal government. It doesn’t want to do that, so instead it does what wealthy Americans like President Trump do when they want to spend tax-free: it borrows. In this way, the money is here, in the U.S., in the form of the proceeds of the debt.

Knowing that the money will not come home at a high tax rate, politicians give these companies a break: a temporary “amnesty” or “tax holiday” at a reduced rate. Congress last tried this trick during George W. Bush’s presidency. As now, politicians floated the idea of a 10% special rate. But the corporate world protested, explaining that they would not bring vast sums of money back at a 10% tax rate. So Congress and the Bush Administration sweetened the deal, and gave the corporations a 5.25% rate -- presumably the level at which these corporations would save money by not having to do the complex financial manipulations involved in their overseas tax-avoidance games. At that 5.25% tax, multi-national companies did bring billions back, and the government reaped a small tax gain.

But the 2004 repatriation created few if any new jobs. Instead, the companies used the money to pay down debt, pay their shareholders (who tend to be investors wealthier than the average working mom or dad) in dividends or stock-buybacks. There is plenty of evidence to support repatriation’s failure as a policy.

Meanwhile, as soon as the 2004 tax holiday was over, US based multinational corporations went back to business as usual, which is why we once again have “trillions” in corporate profits sitting overseas, waiting for the next “one time” “holiday.” The real effect of this once-every-thirteen-years-or-so tax policy is to make the corporate tax for sophisticated U.S. multinational companies 5.25% -- less than the state and local sales tax in 43 states.

And so here -- perhaps -- we are again, with Trump and a Republican Congress. Repatriation does not portend a magical mystery bus bringing trillions of dollars home to solve all of our woes. It’s yet another trick to help corporations and their wealthy owners. The reality that the rich are winning and workers are not is going to take something more real than repatriation to fix.

Come visit us, by the way, at as we explore ways to explain the tax system to the people, hoping to supply knowledge so we the people can have real power.

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