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A “Ludicrous” Tax System Leaves Billions of U.S. Corporate Profits Overseas

Bernice Napach
Daily Ticker

Despite record profits, U.S. companies are not paying more in corporate taxes. Instead, they’re taking advantage of tax loopholes to limit taxation, including the no-tax rule on foreign profits if those profits remain overseas.

Sixty of the biggest U.S. companies parked a total $166 billion offshore last year, shielding more than 40% of their profits from U.S. taxes, according to a report in Monday’s Wall Street Journal. They include Apple (AAPL), General Electric (GE), Microsoft (MSFT), Pfizer (PFE), Merck (MRK) and Johnson & Johnson (JNJ). Abbott Laboratories (ABT) had $8.1 billion in untaxed overseas earnings, which topped its net income of $6 billion and swelled its pile of its untaxed overseas earnings to $40 billion.

Related: Wall Street Tells Washington: Cut Corporate Taxes in 2013

Many companies, along with their lobbyists such as The Business Roundtable argue that they would repatriate foreign earnings if those earnings could come home tax-free. They favor a so-called territorial system of taxation, which would tax only U.S. earnings of American companies and exempt most or all foreign income from taxes. They say such a system would not only make U.S. companies more competitive globally because most other industrialized countries use a territorial system for taxation but also encourage more investment in the U.S. including more hiring.

Opponents like Citizens for Tax Justice argue that the territorial system is an incentive for companies to move more operations overseas because those earnings, when repatriated, would be taxed at a lower rate than profits earned in the U.S.

Related: Corporate Taxes: Notably Absent from the Fiscal Cliff Discussions

Henry Blodget of The Daily Ticker calls the current system to tax overseas profits “ludicrous” since it encourages companies to keep billions of dollars in profits overseas, but he admits there’s no easy answer.

One suggestion is a tax amnesty on foreign earnings but that, says Blodget, would encourage companies to wait for amnesty day before repatriating earnings. Clyde Prestowitz, president of the Economist Strategy Institute and former counselor to the Secretary of Commerce in the Reagan Administration writes on ForeignPolicy.com that a one-year tax amnesty for foreign earnings in 2004 yielded a disappointing $360 billion brought home and most of that went to shareholders in the form of dividends rather than to new investment and job creation.
But there may be some hope yet.

“Corporate tax reform is one of the few issues that Republicans and Democrats agree need fixing,” says The Daily Ticker’s Aaron Task. We'll see if that agreement continues after Congressman Paul Ryan, the chairman of the House of Representatives Budget Committee, unveils his tax plan Tuesday which will likely followed later next week by a Democrat tax play that Senator Patty Murray, chairman of the Senate Budget Committee, is working on.

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