From the CBPP link:
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When it enacted the 2004 dividend repatriation tax holiday, Congress explicitly stated that it should not be repeated: ‘‘ conferees emphasize that this is a temporary economic stimulus measure, and that there is no intent to make this measure permanent, or to ‘extend’ or enact it again in the future.’’<31> Ignoring this intention and resurrecting the tax holiday would lead U.S. multinationals to expect more such tax holidays in the future. That, in turn, would give them a powerful incentive to keep or even shift profits and jobs out of the United States in anticipation of the next tax holiday.
Most of the funds repatriated under the 2004 holiday came from low-tax countries and tax havens, including the Netherlands, Luxembourg, Bermuda, and the Cayman Islands.<32> As two journalists who examined this issue noted, “ is important to step back and consider how all these funds got bottled up in low-tax countries. It’s not just the result of U.S. multinationals investing in plant and equipment in attractive low-tax, low-wage locations. U.S. multinationals engage in aggressive tax planning . . . in order to shift profits out of the United States and other high-tax countries and into havens like Ireland and Bermuda.”<33>
They also observed, “(repeated) tax holidays would mean that over the long term, the tax cost of overseas investment by U.S. multinationals would be reduced, just as if the law provided a tax credit for foreign investment. So the economic effect would be to further increase the tax advantages of foreign over domestic investment in the long term.” Finally, “the turbocharge created when low foreign rates are combined with easy profit shifting would encourage further foreign investment and foreign job creation.”
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Some commentators have warned that business interests will press for repeated tax holidays until there is international tax reform that removes the incentive for corporations to delay paying U.S. income tax by sheltering their profits overseas.<35> The solution, however, is not repeated tax holidays that constitute unsound economic and tax policy, but rather to tackle the underlying problem.<36>
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The CBPP proposed a solution in this piece:
Six Tests for Corporate Tax Reform <...>
3. Does the proposal reduce the tax code’s bias toward overseas investments?
International tax regimes span the spectrum between “residence” (or “worldwide”) and “territorial.” A residence tax system taxes a company on its global income, regardless of where that income was generated; a territorial system taxes only the domestic share of a multinational company’s income.
The current U.S. corporate income tax, while often characterized as a worldwide system, is actually a hybrid. It does tax U.S.-based corporations on a worldwide basis, while providing a credit for foreign taxes paid in order to avoid double taxation. In a major nod in the territorial direction, however, foreign profits are not taxed until they are repatriated. As a result, corporations often “defer” repatriating their foreign profits indefinitely, with the result that they never pay taxes on them — even though they may obtain an immediate U.S. tax deduction for expenses they incur in supporting the same overseas investments.
This deferral feature often allows U.S. multinationals to pay significantly lower taxes on profits from their overseas investments than on profits from their domestic investments. The average combined tax rate, including both U.S. and foreign taxes, on large (i.e., assets over $10 million) corporations’ total foreign-source income was 16.1 percent in 2004, two-thirds of the 25 percent tax rate on their domestic income, according to a 2008 Government Accountability Office (GAO) study. (The average U.S. effective tax rate on foreign-source income was around 4 percent.) <7> As the Urban Institute-Brookings Institution Tax Policy Center has explained, such a large differential between tax rates on domestic and foreign income provides strong incentives for firms to shift reported profits from the United States (and other countries with comparable tax rates) to low-tax countries. <8>
This tilt in the tax code in favor of foreign investments has important revenue implications: the deferral provision will cost the Treasury $212.8 billion over the 2012-2016 period, according to the Office of Management and Budget, making it one of the single largest tax expenditures in the corporate tax code. As policymakers begin work on base-broadening tax reforms, they should remember that the result of leaving these and other international tax expenditures untouched — let alone expanding them, as some have proposed — would be higher tax rates on domestic investments than would otherwise need to be the case.
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