Wednesday, May 18, 2011

Happy Repatriation Holiday

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Recent consideration of a repatriation holiday in order to encourage domestic investment and job creation has largely centered on differentiation from the 2004 holiday, which, with the benefit of hindsight, yielded mostly stock buybacks and dividends. The proposal put forth by Rep. Kevin Brady (R-Texas), which has yet to have been introduced in the current Congress, aims to avoid a similar result by attaching strings to a 5.25% tax rate for repatriated earnings. Chief among those strings is the $25,000 fine that would "claw back" the tax savings in the event that the taxpayer laid off workers in the interim. Specifically, if, in the two years immediately succeeding the repatriation, the taxpayer reduces its average employment level below the level prior to the repatriation, the fine would apply for each worker below the pre-repatriation level. Arguably, the proposal provides a potent incentive for repatriating employers to retain current employees; how such retention translates to job creation is unclear.

Notwithstanding such lack of clarity, the underlying intent (and presumably the key to securing bipartisan support) of the proposal is to avoid presenting MNCs with the same sort of bow-wrapped gift that they received in 2004. The Obama administration has stated through the Treasury Department, however, that it will not consider a repatriation holiday without concomitant comprehensive tax reform. Comprehensive tax reform is indeed a much broader subject to which I cannot do justice in this particular posting.

One might think that MNCs would jump at the prospect of a holiday, but at least one major U.S.-based MNC has indicated otherwise. An IBM official recently stated a preference for predictability and certainty, which a repatriation holiday would undermine.

Perhaps "holiday" is an inappropriate lexical assignation (for American purposes) for a reduced rate of taxation relative to repatriated earnings in the form of dividends received by U.S. parent corporations. After all, "holidays" occur with a modicum of predictable regularity, whether they occur semi-annually, annually, or even weekly. The exact date of a holiday may vary depending on its parameters; for instance, Easter may not necessarily fall on the same day of the month from year to year, yet it always falls on the Sunday after Good Friday. The Sabbath always falls on the same day every week. New Year's Day is always January 1 and is always preceded by New Year's Eve on December 31. The point is that "holidays," by their very nature, are predictable and certain, which allows for planning to incorporate them.

Tax planning demands similar predictability and certainty, but apparently tax "holidays" do not. I submit that less sonorous, but arguably more apt terms would be "vacation," "recess," "repose," or perhaps even "furlough."

-- Benjamin A. Jung, U.S. International Tax Law Editor

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