WSJ.com - Tax Break Brings Billions to U.S., But Impact on Hiring Is Unclear
Nine months into 2005, U.S. companies have announced plans to repatriate about $206 billion in foreign profits under a special one-year tax break.
But it's far from clear whether the spending has spurred the job growth that backers of the break touted.
A law signed by President Bush shortly before the 2004 election allows companies to transfer profit from overseas operations back to the U.S. this year at a special low tax rate of 5.25%. Businesses often keep such funds outside the country in part to avoid paying taxes in the U.S., where the effective rate on repatriated profit for many companies is normally closer to 25%. Backers said the measure would provide an incentive to companies to invest those funds in U.S. operations.
Most companies using the break have offered only broad outlines for how they intend to use their windfall. For the most part, they say they are using the bulk of the money for tasks such as paying down debt and meeting payrolls. Direct job creation rarely appears on the list.
I'm not sure who in their right mind actually thought that this would be a miracle 'job creation' incentive. Perhaps the initiative was marketed that way to the public, but companies who received this windfall did whatever they wanted with the cash, no strings attached. Which of these companies pays the top corporate tax rate anyway? I'll hazard a guess that the number is pretty small.
Some companies are even bringing home piles of cash while continuing to downsize. Colgate-Palmolive Co., of New York, said in July that it planned to repatriate $800 million, at a time when the company also is pursuing plans to shut a third of its factories and eliminate roughly 12% of its work force, or 4,450 people, over four years. So far, 91 large companies have disclosed some profit repatriation under the break, according to International Strategy & Investment Group Inc., an investment advisory company.If I can find the list, I'll post it as an addendum. Here are the top 10 in the meantime: Pfizer, Merck, Hewlett-Packard, Johnson & Johnson, DuPont, Schering-Plough, Bristol-Meyers Squibb, IBM, Eli Lilly, Pepsico.
Some analysts contend that by offering a one-year break, the law actually encourages companies to horde profits overseas in the future, since they are likely to expect this to happen again.Critics also question whether the money is being funneled indirectly into improper uses. Companies aren't supposed to use repatriated funds for stock buybacks, dividends, or executive compensation, but there is no requirement that companies isolate funds or show that spending on approved uses is above what the company would have spent normally.
Companies are required to file board-approved plans to the Treasury Department, mapping out how they plan to use the money for approved uses, notes Nicholas Bohnsack, associate managing director of International Strategy & Investment Group Inc., an investment advisory company. “Companies are filing reports that fall within the regulations,” he says, “but that just frees up money in another kitty.”
ISI believes increased dividend payouts and stock buybacks will be two of the top five end results of the repatriation. The other main uses will be mergers and acquisitions, capital expenditures and debt retirement, all of which are allowed under the law, ISI says.
“Since cash is fungible, there's really no way to track it,” says Christopher Senyek, accounting analyst at Bear Stearns.
Tags: tax
