US tax holiday proposed for foreign profits

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A group of lawmakers in the House of Representatives introduced legislation that would give US companies a temporary tax holiday on profits earned overseas, in an attempt to wrench back more than $1,000bn of corporate money stored internationally.

The effort, led by Kevin Brady, the top Republican on the joint economic committee, and supported by Jim Matheson, a Democrat from Utah, could influence the Obama administration as it weighs whether to push for a sweeping overhaul of corporate taxation.

Under the new bill, companies would only pay 5.25 per cent tax – compared with the current 35 per cent top rate – if they bring back their international profits to the US in 2011 and 2012, though they would have to pick which year they would want the beneficial treatment to take effect.

“Why, in this weak economic recovery, would we not act now to bring back $1,000bn in stranded US profits back to America for investment?” said Mr Brady, who represents a district in Texas. “This is about creating jobs, expanding US businesses and strengthening American companies.”

A repatriation holiday has long been called for by organisations representing corporate America, but it has also gained a union backer in Andy Stern, the former labour leader now at Georgetown University.

In an opinion piece for Politico on Wednesday, Mr Stern said: “This is a just a different kind of stimulus — one without a price tag for individual taxpayers.” Mr Stern argued that the proposal would raise revenue for the government, which could be reinvested into infrastructure projects, or used for deficit reduction.

The plan has the support of top House Republicans – particularly Eric Cantor, the majority leader – but is likely to struggle to make it through the Senate, where many Democrats are worried it would encourage the shifting of plants and operations overseas.

In addition, there are concerns in the wake of the move that the money brought back was not used to make new investments in the US but to reward shareholders through share buy-backs and dividend payments. Critics said this is what occurred the last time such a tax holiday was enacted in 2004.

The Obama administration, which is weighing whether to press ahead with its own plan for corporate tax reform, has rebuffed the idea of a repatriation holiday in advance of a broader revamp of business taxation.

In a blog post in March, Michael Mundaca, the outgoing assistant Treasury secretary for tax policy, called it a “mistake” and a “distraction”. This could pose a big obstacle to the chances of the legislation being enacted.

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