Several of the biggest U.S. companies — including Apple and Procter & Gamble — would no longer be able to escape taxes on the trillions in overseas profits they’ve accumulated, under a tax bill released by House Republicans.
Earnings held in cash would be taxed at 12 percent while profits invested in less liquid assets like factories and equipment face a 5 percent rate, according to the legislation released Thursday. Both taxes would be mandatory, not optional, and companies would have as long as eight years to make their payments on an annual basis.
The 12 percent rate is “borderline of being business unfriendly,” said Steven Englander, head of research and strategy at Rafiki Capital Management. “It’s not a game changer, but the changing tone is a disappointment. It’s gone from the way forward for the tax system to a piggy bank to pay for the tax cuts.”
The provision is part of a tax bill that contains sweeping changes for business and individual taxes, pitched by Republicans and the White House as a way to boost job creation and the U.S. economy. By requiring companies to pay taxes on their past overseas profits, the measure would address a loophole of the U.S. corporate code that has allowed multinational firms to hoard their foreign earnings offshore — beyond the government’s reach.
U.S. companies have stockpiled as much as $3.1 trillion offshore, according to an estimate by Goldman Sachs in a recent research note. Under current law, the U.S. taxes multinationals on their global earnings but allows them to defer taxes on foreign earnings until they bring them back to the U.S., or “repatriate” them. But doing so is not mandatory.
The largest stockpiles belong to Apple at more than $200 billion, followed by Microsoft, Cisco Systems, Alphabet Inc., Oracle and Johnson & Johnson, according to data compiled by Bloomberg. If this provision becomes law, it would raise $223 billion over the next decade, according to an estimate by the Joint Committee on Taxation that’s cited in the bill.
The Information Technology Industry Council, which represents nearly every major tech company, was initially holding its judgment on the proposal, wanting to keep working with lawmakers to shape it. Microsoft, Alphabet and Oracle declined to comment separately.
“If done right, tax reform will place American companies on a level-playing field, increase competition globally, and create more jobs for Americans,” Dean Garfield, the council’s top executive, said in an emailed statement. Tax reform was a “once-in-a-generation opportunity,” he said.
While global companies based in the U.S. may be disappointed by the tax on overseas profits being higher than expected, they did get the much-desired reduction in the U.S. corporate rate, with it being cut to 20 percent from 35 percent.
“If we are serious about growing the economy, creating jobs and increasing wages for all Americans, this country needs a modernized tax code. It is that simple,” said Jamie Dimon, chairman and chief executive officer of JPMorgan Chase & Co. and chairman of the Business Roundtable The Roundtable is a powerful lobbying group for the largest U.S. companies, including many with overseas cash.
“While the tax reform bill released today deserves close analysis, it is significant progress toward achieving these goals,” Dimon said.
(c) 2017, Bloomberg · Lynnley Browning, Laura Davison, Matt Townsend