GE to repatriate billions, what does this mean for future repatriation by other U.S. multinationals?: An Article Authored by Paul Oliveira, CPA from KLR - Accounting Firm Boston, Massachusetts, Providence, Rhode Island

Articles

GE to repatriate billions, what does this mean for future repatriation by other U.S. multinationals?

posted Jun 8, 2015 by Paul Oliveira, CPA

  • LinkedIn
  • Google+

General Electric’s announcement in April that it plans to repatriate $36 billion of cash as part of a restructuring means that it will incur a $6 billion tax bill as a result of the repatriation. The move surprised many in the tax world, given GE’s reputation for having a low effective corporate income tax rate.

The decision came as the United States’ worldwide tax system has come under fire. With the increasingly international nature of businesses today, many U.S. multinationals earn the majority of their income abroad. Critics argue that the U.S. tax system, coupled with the country’s high corporate income tax rate:

  • Renders U.S. multinationals uncompetitive,
  • Discourages repatriation, and
  • Encourages more aggressive tax planning, such as corporate inversions.

Taxation of foreign-source income

U.S. corporations are taxed on a worldwide basis. Subject to certain exceptions, income earned outside the country is not subject to U.S. tax until it is repatriated. At that point, the money is included in a corporation’s gross income. To mitigate double taxation, U.S. companies may elect either to deduct or claim a foreign tax credit for the foreign income taxes that were paid or accrued.
Most other developed countries have adopted a territorial tax system, generally taxing only income earned within their borders.

In 2004, Congress enacted Internal Revenue Code Section 965, an effort to stimulate the U.S. economy by triggering repatriation of foreign earnings. The provision allowed U.S. companies to repatriate earnings from foreign subsidiaries at a reduced tax rate if they satisfied certain conditions. Specifically, U.S. companies could elect, for one tax year, an 85% dividends-received deduction for eligible dividends from their foreign subsidiaries.

That repatriation holiday was meant to be a temporary stimulus measure and there was no intent to make it permanent, extend it, or enact it again.

More repatriation ahead?

Reports on the repatriation holiday have been largely critical of its overall effectiveness — questioning, in particular, the extent (if any) to which it:

  • Actually stimulated the U.S. economy or furthered jobs growth,
  • Encouraged corporate taxpayers to hoard money overseas and wait for Congress to pass another repatriation holiday, and
  • Disproportionately benefited taxpayers that are the most aggressive in shifting income overseas.

There have been subsequent proposals for similar repatriation holidays — or other tax measures that would minimize the impact of repatriating overseas funds — but none have gained much traction.
Although GE’s decision was driven by many nontax factors, it appears that the company’s tax department wasn’t particularly optimistic about the short-term prospects for another repatriation holiday or other “pro-business” tax revision. Although other multinational corporations may share that lack of optimism, few actually have decided to repatriate thus far.

U.S. multinationals have an estimated $2.1 trillion or more of earnings reinvested overseas, $100 billion of which is attributed to GE. Analysts have said that about $300 million was repatriated or earmarked for repatriation in 2014 by companies in the S&P 500. GE is traded on that stock market.

It is uncertain what other companies may do this year with their cash parked abroad, but some observers believe they also may grow tired of waiting for a second repatriation holiday and decide that it makes good business sense to follow GE’s lead.