Healthy Skepticism Library item: 466

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Publication type: news

Martinez B.
Big U.S. firms could reap windfall
The Globe and Mail 2004 Jun 25

Full text:

Big multinational pharmaceuticals and technology companies in the United States are excited by a provision in a pending tax bill that would permit them to bring home profits earned abroad without incurring big American taxes.

A provision in the bill wending its way through the U.S. Congress allows American companies with foreign operations to “repatriate” earnings the companies have been permanently holding overseas, at a tax rate of 5.25 per cent. At the current tax rate of 35 per cent, companies have had little incentive to bring foreign earnings into the United States.

Among the biggest winners would be drug companies such as Pfizer Inc., which has $38-billion (U.S.) in accumulated foreign earnings that would be eligible for the lower tax rate if brought into the United States.
Hewlett-Packard Co. has $14.4-billion, and General Motors Corp.
$11.6-billion, according to the companies’ latest annual regulatory filings.
In total, an estimated $650-billion is available for so-called repatriation if the legislation becomes law, according to J.P. Morgan Chase Bank.

“Literally, it’s a sort of windfall,” said Robert Willens, corporate tax analyst at Lehman Brothers Inc. “I can’t recall something like this ever happening before, where companies were able to tap into this great source of resources on such a low-cost basis.”

If the bill passes, companies could use the cash brought into the United States to invest in their U.S. plants and operations, or to reduce debt or buy back stock. They could also use the funds to hire or train workers. The money must be reinvested in business in the United States within 12 months after the law is enacted.

At HP, “debt reduction is likely to be used in terms of strengthening our balance sheet, but beyond that we’re in an evaluation process,” said Dan Kostenbauder, vice-president of transaction taxes. “We have a good general sense” about what the company would do with the additional cash, but “at the end of the day you need to know exactly what the rules are going to be,” and when the law would be enacted.

“From our perspective, it makes perfect sense,” said Chuck Mulloy, a spokesman for Intel Corp. of Santa Clara, Calif., which has $7-billion in overseas earnings that would be eligible. “I’m not going to forecast what we might do” with the additional capital, “but I can tell you what we have under way right now.” He said the company in April embarked on a $2-billion renovation of one of its factories in Arizona and is involved in buying equipment for another factory in Oregon.

At drug company Eli Lilly and Co., “We’re looking at a number of options,”
said David Lewis, the chief tax executive. He said Lilly has been “generally considering a variety of uses,” including investing in its own research and development or in that of smaller firms.

The repatriation provision is part of a wider tax bill in Congress. At the heart of the bill is the repeal of an export-tax break the World Trade Organization has ruled illegal.

The European Union has retaliated by imposing tariffs on U.S. goods, which is why Congress is trying to act quickly, despite the difficulty of passing a tax bill in an election year.

The Senate already has passed the bill, but the biggest hurdles are in the U.S. House of Representatives, where some Republicans and many Democrats have objected to new breaks the bill offers to multinational companies, for fear they will encourage beneficiaries to send jobs overseas.