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Foreign Corporate Profits Are Not "Trapped" Abroad

David Callahan

Multinational corporations have pushing hard over the last year for a repatriation tax holiday that would allow them to bring foreign profits back to the U.S. at a very low tax rate. They argue that such a giveaway would be a boon to the economy because those accrued profits -- over $1 trillion -- are now "trapped" overseas and can't be used for productive purposes here in the United States.

But new data released this week by the Senate Permanent Subcommittee on Investigations, chaired by Carl Levin, finds these funds aren't really so trapped after all. According to a press release from the committee:

Earlier this year, a survey was sent to 27 U.S. multinational corporations and found they held more than half a trillion dollars in tax-deferred foreign earnings at the end of FY2010. The survey also found that 46% of those foreign earnings – almost $250 billion – was maintained in U.S. bank accounts or invested in U.S. assets such as U.S. Treasuries, U.S. stocks other than their own, U.S. bonds, or U.S. mutual funds.

The survey also found that corporations varied widely in the extent to which they placed foreign earnings in U.S. assets. Nine of the 27 companies, or one-third, including Apple, Cisco, Google, and Microsoft, held between 75 and 100% of their tax-deferred foreign earnings in U.S. assets. Eleven corporations invested 25% or less of their tax-deferred foreign earnings in U.S. assets. This survey information is the first to provide data showing the amount of tax-deferred offshore corporate earnings that are maintained in the United States.

When asked why they invested their foreign funds in U.S. assets, several of the surveyed corporations offered explanations centering on the economic strength of the United States compared to the rest of the world. They pointed to the safety and security of the U.S. dollar and other U.S. assets, suppliers who preferred to be paid in U.S. dollars, and the ability of the U.S. currency to maintain its value over time better than other currencies. . . .

Corporations are able to invest their foreign earnings in U.S. assets without treating them as “repatriated” and subject to taxation, because the federal tax code, specifically Section 956(c)(2), already allows U.S. corporations to use foreign funds to make a wide range of U.S. investments without incurring tax liability. If those U.S. investments then produce income, that additional income may be subject to taxation.

That $250 billion of foreign funds are invested in U.S. assets shows U.S. corporations are already well aware of the tax code provision allowing them to return foreign earnings to the United States on a tax-free basis.