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Proposed Repatriation Tax Relief Bill Unlikely to Drive USA Investment
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Written by James D. Crawford   
Thursday, 22 December 2011
Proposed legislation to provide a temporary tax holiday for U.S. firms repatriating foreign earnings is unlikely, if passed, to support growth-oriented investment by U.S. firms.

Fitch expects most firms benefiting from the proposed repatriation tax relief, notably large multinational companies in the technology and pharmaceutical sectors, to prioritize share repurchases at a time when cash balances are strong and capital spending plans are increasingly uncertain in the context of slowing global growth.

The introduction of a Senate version of the tax holiday legislation today follows a similar House version of the bill introduced by Rep. Kevin Brady (R-Texas) earlier this year. Both bills would temporarily cut repatriation tax rates to as low as 5.25%, compared with a typical corporate earnings tax rate of 35%.

Overseas earnings and excess cash held offshore by firms such as Pfizer, Oracle and Apple could total more than $1 trillion. Should tax relief be offered only on a temporary basis, Fitch believes most multinationals would likely return repatriated cash to shareholders through share repurchases and dividends rather than investing cash in U.S. growth projects or reduce debt.

Similar legislation passed in 2004 led U.S. companies to repatriate more than $300 billion in overseas earnings. However, there is no evidence to suggest that much of the repatriated cash was used to invest in new facilities or employment growth. Tailoring legislation to encourage job growth and investment in the U.S. is particularly difficult due to problems associated with tracking the ultimate allocation of repatriated cash.

Passage of broader corporate tax reform, potentially including permanent changes in tax treatment for repatriated cash, would likely do more to drive a more rational global allocation of capital and labor by U.S. multinationals.

Pharmaceutical and medical device manufacturers may hold $200 billion or more in reinvested earnings and cash offshore. For the tech sector, Fitch believes cash held overseas may account for between 60% and 65% of consolidated cash balances.

Prospects for passage of the bill in the Senate appear questionable in light of White House and Senate Democrats' determination to consider the repatriation issue in the context of broader tax reform measures.

Additional information is available on www.fitchratings.com
Last Updated ( Thursday, 22 December 2011 )