U.S. Corporate Income Abroad: The Cost of Cash Coming Home

"Currently, however, corporations pay tax on foreign earnings only when they repatriate them. No wonder, then, that the amount American firms stash abroad has been growing steadily for years." The Economist[1]

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As the Presidential candidates for 2016 build their political platform, their positions on tax policy are beginning to take shape. This comment serves as an explanation of the current state of foreign-earned income by American companies, estimated to be $2.1 trillion,[2] and the tax implications of transferring it into their U.S. accounts. By comparing the tax law as it exists today with the proposed policies of select candidates, a suggested policy will be offered as a best course of action.


What is Tax Repatriation?

The Treasury Department can tax U.S. citizens on income earned anywhere in the world under a citizen-based taxation theory.[3] A foreign-owned subsidiary of a U.S. company, however, is not a “domestic” in the eyes of the U.S. Treasury as it was not incorporated under the laws of any U.S. state.[4] The Internal Revenue Code dictates that money earned by a U.S. wholly-owned foreign subsidiary outside the United States is tax deferred income, meaning tax is only paid when the earnings are brought back into the U.S.[5] Once repatriated to the United States, these profits are assessed at the same tax liability of 35% for corporations on income over $10 million,[6] offset with applicable foreign income tax credits.[7] Notably, this makes the United States the only globally developed nation to tax income earned abroad.[8]

As recently as 2004, Congress allowed for a “tax holiday” that subjected a 5.25% tax on repatriated distributions in cash instead of the standard liability.[9] The result, however, was not one Congress had intended. Hoping the extra capital would be a boon for investment in research and employee training, companies instead used the profits to fund major stock repurchases and to lay off thousands of workers.[10]


What the Candidates are Saying?

John Kasich favors a plan that would allow companies to repatriate profits without paying any federal income tax.[11] Under the Kasich plan, a company would pay the territorial tax of the jurisdiction in which it was earned and avoid a “double taxation” when returned to the U.S.[12] Ben Carson supports a similar plan with the condition that 10% of the repatriation be used for job creation enterprises.[13]

Donald Trump also favors a return of foreign profits to spur investment in the U.S. economy, but believes companies will have to pay “something.”[14] A Trump plan would see companies pay a rate of 10% on repatriated foreign profits.[15] Jeb Bush, Chris Christie, Ted Cruz, and Marco Rubio also support a rate of 6-10%.[16]

Bernie Sanders proposes a plan eliminating tax deferral, taxing profits as they are earned.[17] This plan would obviate the incentive for companies to keep profits overseas as they would have already paid the tax on the earnings, and could freely transfer funds across jurisdictional boundaries.[18]  Hilary Clinton has not made a specific proposal on the issue.[19]



As the failed repatriation of foreign profits in 2004 shows, corporations will use capital in the most advantageous venture available. With the expanding balance sheets of corporations following the financial crises of 2008, the problem is not a lack of capital, but a lack of profitable U.S. investments. With a ten-year T-bill rate at 2.2% and corporate yields under 5% it makes more sense for companies to reinvest their earnings abroad.[20] If the Treasury were to engage in a policy of only allowing repatriated income invested in “war bonds” to be taxed at the preferential rate, it could take huge steps toward solving on of the most pressing issues facing this country—infrastructure. By offering interest rates nearer to traditional rates,[21] the Treasury would be able to raise capital for a critical purpose facing the country, while also encouraging investment of corporate profits domestically. The idea of using overseas profits to fund a new highway bill has been talked about by both political parties.[22] But with a major election just one year away, it is highly suspect whether any bipartisan deal will seriously be attempted.


[1] An Offer They Could Refuse, The Economist, Feb. 7, 2015, http://www.economist.com/news/finance-and-economics/21642196-presidents-plan-makes-no-sense-offer-they-could-refuse.
[2] Richard Rubin, U.S. Companies Are Stashing $2.1 Trillion Overseas to Avoid Taxes, Bloomberg, Mar. 4, 2015, http://www.bloomberg.com/news/articles/2015-03-04/u-s-companies-are-stashing-2-1-trillion-overseas-to-avoid-taxes.
[3] Keith Engel, Tax Neutrality to the Left, International Competitiveness to the Right, Stuck in the Middle With Subpart F, 79 Tex. L. Rev. 1525, 1529 (2001); see also Cook v. Tait, 265 U.S. 47, 56 (1924) (holding that the power to tax is not based on the location of a citizen or his property, but on "his relation as a citizen of the United States and the relation of the latter to him as a citizen"). Id. at n.8.
[4] I.R.C. § 7701(a)(4).
[5] Engel, supra note 2, at 1530; see also I.R.C. §§ 951-65.
[6] I.R.C. § 11(b)(1)(D).
[7] § 901.
[8] Colleen Graffy, Op-Ed., The Law that Makes U.S. Expats Toxic: A measure targeting tax evasion pushes Americans out of bank accounts—and jobs—abroad., Wall St. J., Oct. 10, 2015, http://www.wsj.com/articles/the-law-that-makes-u-s-expats-toxic-1444330827.
[9] Floyd Norris, Tax Break for Profits Went Awry, N.Y. Times, June 4, 2009, http://www.nytimes.com/2009/06/05/business/05norris.html; see, e.g., American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 422, 118 Stat. 1418, 1514-19 (2004).
[10] C. Robert Gibson, Candidates’ plans to repatriate profits only encourages corporate tax avoiders, The Guardian, June 13, 2015, http://www.theguardian.com/money/us-money-blog/2015/jun/13/repatriate-profits-encourage-corporate-tax-avoiders
[11] John Solomon, John Kasich wants new tax system for offshore profits, smaller government, Wash. Times, Nov. 1, 2015, http://www.washingtontimes.com/news/2015/nov/1/john-kasich-wants-new-tax-system-for-offshore-busi/?page=all.
[12] Id.
[13] Matthew J. Belvedere, Ben Carson: 6-month tax hiatus for overseas profit, CNBC, Oct. 7, 2015, http://www.cnbc.com/2015/10/07/dr-ben-carson-would-declare-a-6-month-tax-hiatus-for-profits-held-overseas.html.
[14] Tory Newmyer, Corporate tax dodgers will love Trump’s plan to crack down on corporate tax dodgers, Fortune, Aug. 21, 2015, http://fortune.com/2015/08/21/trump-goes-easy-on-tax-dodgers/.
[15] Id.
[16] Comparing the 2016 Presidential Tax Reform Proposals, Tax Found., http://taxfoundation.org/comparing-2016-presidential-tax-reform-proposals (last updated Nov. 11, 2015).
[17] Offshore Tax Havens, Bernie Sanders (Apr. 14, 2015), http://www.sanders.senate.gov/newsroom/recent-business/offshore-tax-havens.
[18] Id.
[19] Comparing the 2016 Presidential Tax Reform Proposals, supra note 16.
[20] Composite Bond Rates, Yahoo! Finance, http://finance.yahoo.com/bonds/composite_bond_rates (last visited Nov. 27, 2015).
[21] A competitive rate of 5-7% based on figures derived from U.S. Department of Treasury, Research Center. Daily Treasury Yield Curve Rates, U.S. Dept. Treasury, https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldAll.
[22] Burgess Everett and John Bresnahan, Shumer in talks with Ryan on major tax, infrastructure deal, Politico, Sept. 29, 2015, http://www.politico.com/story/2015/09/charles-schumer-paul-ryan-tax-infrastruture-moderate-214167.