January 19, 2012 International Taxation Hot Issue – Repatriation
“…$1.4 trillion of corporate cash is trapped overseas…”
“…Corporate America needs a tax holiday to repatriate these funds…”
What does this mean? Why should we care about this?
To answer these questions, you need to know a little about International Taxation. So, here is an example that should shed some light on the issues:
- Mega Corp. is a US based multi-national corporation with operations in the US and Ireland.
- They file a US Consolidated Tax Return.
- They manufacture and sell the same product in both locations.
- Their taxable income is $1M in the US and $1M in Ireland.
- Taxable income is measured by shipments from their facilities less corresponding expenses incurred.
- Due to “throwback” rules, shipments to another country, most likely, be a taxable sale from the country where it shipped from (either the US or Ireland).
- Assuming they are paying the top corporate tax rates, they will pay $350K (35% rate) in US taxes and will pay $125K (12.5% rate) in Irish taxes.
- If they do not repatriate (i.e. wire transfer) funds from Ireland to the US, they will NEVER pay US taxes on their Ireland based income.
- If they wire transfer funds from Ireland to the US, they will pay US taxes of 22.5% on these funds (the difference between the US rate of 35% and the Ireland rate of 12.5%).
So, one of the recent proposals is an 8.25% tax rate on these repatriated earnings (money transferred from Ireland to US in our example), which would be lowered to 5.25% if the money is used to create jobs. The most recent “tax holiday” was 2004. Results are tough to measure. Obviously, those who favor the holiday claim companies will use these funds to expand operations in the US. Others argue it is irrational to pay any US tax if these funds are not needed in the US.
Ask yourself these questions, now:
- Assume that you need more capacity, which will create more taxable income – with all else, other than taxes, being equal, where will you expand – the US and lose 35% of your profits or Ireland and lose only 12.5% of your profits in taxes?
- Now ask yourself the same question and factor in that about every 5 years, Congress will approve a tax holiday.
- Transfer pricing allows one facility to charge another facility within a company for products or services. This “funny money” charge is added to taxable income for the facility that provided the product or service; and a taxable expense for the other facilities using the product or service. Now, in our example, assume there is a major common part that makes sense manufacturing at just one facility (thus increasing that facility’s taxable income and decreasing the other facility’s taxable income). Doesn’t it make sense to increase profits in the country that is paying 12.5% taxes and lowering profits in the country that is paying 35% taxes?
We do not attempt to answer these questions, but present these issues to shed some light on this subject, which should get attention during the upcoming Presidential Elections.
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.