updated 07:00 pm EDT, Wed March 21, 2012
Both sides defend their positions
Thus far, the Obama administration has resisted calls for a "tax holiday" on corporations that want to bring foreign profits into the US, despite recently stepped-up pressure from Apple in the form of comments during its recent investor conference call. The iPhone maker is one of a consortium of US-based multinational companies that have argued that the high tax rate of repatriation provides "significant disincentives" to import it.
The case put forth by businesses is straightfoward: foreign profits have already been taxed in the country in which they were earned, and counting the money as additional US income and taxing it at America's current 35 percent corporate tax rate amounts to sky-high double-taxation that keeps companies from using the money in the US. Congress on several occasions has tried passing bills that would temporarily lower the tax rate to five percent in these situations, but the president has effectively stopped each one by promising to veto it.
The administration's argument is that previous "tax holidays" of this type (most recently tried in 2004) did not result in money being reinvested in company growth, research and development or US jobs; the hundreds of billions that were "repatriated" at the tax-holiday rate in 2004 went almost entirely to investors, stock buybacks and executive bonuses that failed to strengthen or even stimulate the economy. Obama's counter proposal has been an offer to permanently lower the corporate tax rate from 35 percent to 28 percent, simplify the tax code and impose a "minimum tax rate" on companies that attempt to move profits offshore specifically to avoid paying US taxes.
The White House argues that a "tax holiday" would bring in repatriated cash at a lower tax rate, and then when the "holiday" was over companies would revert to their present behavior of storing cash offshore and simply wait and lobby for another "tax holiday," effectively lowering the corporate tax rate to five percent. Part of the US deficit, the administration's supporters contend, can be blamed on corporations dodging their societal responsibilities to contribute fairly in taxes.
Offshoring and other techniques have made it so that many large companies, most notably General Electric, effectively pay no tax at all. Multi-national corporations employ a variety of techniques unavailable to individual US citizens to avoid paying even low rates of US taxes. Apple pays an effective 24 percent rate on its income, according to the company's SEC and investor filings.
Apple and other companies argue that the repatriated income would be used for a variety of purposes, including job creation and growth, but that their fiduciary responsibility to shareholders to maximize profits means that they must pursue the course that leads to the smallest tax bite. Corporations perceive the US corporate tax rate as "punitive" and anti-business despite the fact that few companies actually pay the top rate and US corporations, led by companies such as Apple and Exxon Mobile, routinely report record-setting profits.
While Obama's proposal would actually save most companies more in the long run, this is primarily because the US is still one of the world's largest and most profitable markets. As other emerging economies grow, such as India and China, business analysts argue that the impact from a permanently lowered US corporate rate would diminish over time as companies invest more in non-US markets and growth. As an example, Apple recently purchased an Israeli flash technology company called Anobit and is now setting up a technology research center in the country, paid for with profits made outside the US.
Former CEO and Apple co-founder Steve Jobs reportedly took Apple's views on the issue straight to President Obama himself, warning the President that he was headed for a "one-term presidency" due to a perception of being anti-business as expressed through the administration's blocking of repatriation efforts. During Apple's stock-buyback and dividend announcement on Monday, the company explicitly said it would be funding the incentives by using the domestic portion of its nearly $100M cash stockpile to fund the programs, leaving some $64 parked overseas, and publicly rejected any contemplation of repatriating the money at the present time.