US Senate Report Critical Of “Tax Havens”

October 12, 2011

carl_levinUS Senator Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations, released a report today [Oct. 12] that found that a 2004 repatriation tax break allowing US companies to bring $312 billion in offshore earnings back to the United States from off-shore domiciles including Bermuda at an extraordinarily low tax rate did not produce any of the promised benefits of new jobs or increased research expenditures to spur economic growth.

The report looked at the top 15 repatriating companies and found that, instead of spurring jobs and economic stimulus in the US, the tax break was instead associated with increased corporate stock buybacks and executive pay.

A substantial share of the repatriated funds came from off-shore financial centres including Bermuda, the British Virgin Islands, the Cayman Islands, and Switzerland, with seven of the surveyed corporations repatriating between 90 and 100 percent of their funds from jurisdictions branded as “tax havens” by Sen. Levin.

The report also observed that the 5.25 percent tax rate created a competitive disadvantage for domestic businesses that chose not to engage in offshore operations or investments, and provided a windfall for multinationals in a few industries without benefitting the US economy as a whole.

“There is no evidence that the previous repatriation tax giveaway put Americans to work, and substantial evidence that it instead grew executive paychecks, propped up stock prices, and drew more money and jobs offshore,” said Michigan Democrat Sen. Levin [pictured at top]. “Those who want a new corporate tax break claim it will help rebuild our economy, but the facts are lined up against them. That’s why think tanks from the left and right have condemned another repatriation tax break as an unaffordable giveaway to multinationals that have stashed billions of dollars offshore and are now lobbying to get out of paying their fair share of taxes.”

The Levin report makes publicly available for the first time detailed information from the 15 corporations that claimed the largest qualifying dividends under the 2004 American Jobs Creation Act.

That Act allowed corporations a one-time reduction in taxes on offshore income brought into the United States. Supporters said the legislation would infuse capital into US firms which would then use the funds to increase hiring, research, and other investments.

Though the law specified allowable uses of repatriated funds, and expressly prohibited using repatriated money for stock repurchases or executive pay, it did not require corporations to track their use of repatriated funds and so provided no mechanism to monitor compliance with the law. To determine how corporations used their repatriated funds, the Subcommittee surveyed the 15 corporations that repatriated the most money through qualifying dividends, and an additional five firms that repatriated significant amounts.

The top 15 repatriators were Altria, Bristol-Myers Squibb, Coca-Cola, DuPont, Eli Lilly, Hewlett-Packard, IBM, Intel, Johnson & Johnson, Merck, Oracle, PepsiCo, Pfizer, Procter & Gamble, and Schering-Plough [which merged with Merck in 2009]. The additional five repatriators surveyed by the Subcommittee were Cisco Systems, Honeywell International, Microsoft, Motorola, and Wyeth [which was acquired by Pfizer in 2009]. While all 20 corporations provided the requested information, Cisco Systems also disclosed that, after repatriating $1.2 billion in 2006, it later amended its 2006 tax return to eliminate the repatriation deduction claimed for the funds in connection with an IRS settlement resolving various audit issues. In light of that disclosure, the report does not make use of the Cisco survey data.

The top 15 corporations together brought back a total of $155 billion in offshore earnings, or half of all funds repatriated as qualifying dividends. With the additional four corporations, the total amount of repatriated funds was $163 billion.

Among the report’s findings are the following.

No Job Increase. The repatriation tax break failed in its express purpose to increase U.S. jobs. After repatriating $155 billion, the top 15 repatriating firms reduced their overall US workforce by nearly 21,000 jobs.

No R&D Increase. The repatriation tax break did not accelerate investments in research and development. In fact, among the top 15 repatriating corporations, the pace of R&D spending slightly decreased after the tax break.

Stock Buybacks Increased. Despite a prohibition on using repatriated funds for stock repurchases, which are often used as a way to share corporate profits with stockholders and push up the stock price, the top 15 repatriating corporations accelerated their spending on stock buybacks after repatriation, increasing them by 16 percent from 2004 to 2005, and 38 percent from 2005 to 2006. Overall, the 19 surveyed corporations more than doubled the amount of their average stock repurchases, from about $2.2 billion in 2004 to $5.3 billion in 2007.

Executive Pay Increased. Despite a prohibition on using repatriated funds for executive compensation, the pay of the top five executives at the top 15 repatriating corporations jumped 27% from 2004 to 2005, and another 30% from 2005 to 2006. Average worker pay in the same years increased 3% and 11%.

Narrow Group Benefitted. The repatriation tax break benefitted a narrow slice of the U.S. economy, primarily pharmaceutical and technology corporations, while providing no benefit to domestic firms that chose not to engage in offshore operations or investments.

Offshore Funds Increased. Since the 2004 repatriation tax break, repatriating corporations have accumulated offshore funds at a greater rate than before the tax break, evidence that repatriation has encouraged the shifting of more corporate dollars and investments offshore. In 2011, U.S. corporations have record amounts of domestic cash assets totaling around $2 trillion, indicating that the availability of cash is not constraining hiring or domestic investment and that allowing corporations to repatriate still more cash from offshore would be an ineffective way to spur new jobs.

The report findings for the top 15 repatriating corporations are consistent with research that examined all 843 repatriating corporations and found that the repatriation tax break was not associated with increased jobs or research and development expenditures at those corporations.

The report concludes that the repatriation tax break is a “failed tax policy, which has cost the US Treasury at least $3.3 billion in net revenue lost over ten years, produced no appreciable increase in U.S. jobs or domestic investment, and led to U.S. corporations directing more funds offshore.”

The report recommends against a second tax break, warning of a substantial revenue loss, a failure to create jobs, and a new incentive for US corporations to move more jobs and investment offshore in anticipation of future tax breaks.

“We can’t afford a tax break that would deepen the deficit, disadvantage domestic firms, and push more corporate dollars offshore, while failing to stimulate the economy,” said Levin. “Facts are stubborn things, and I’m hoping the facts can break through the lobbying frenzy over yet another corporate tax giveaway that makes no sense and would damage our economic recovery.”

Citing the report’s findings, Levin and North Dakota’s Sen. Kent Conrad, chairman of the US Senate Budget Committee, sent a letter to the Joint Select Committee on Deficit Reduction urging it not to support a repatriation tax break.

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Comments (4)

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  1. Geza Wolf says:

    No way, corporations are corrupt and lie?

  2. Hmmmmm says:

    Not these IB types who just want to be loved and they’ll stay ??! say its not so….. Moral: Wherever its easiest to make money they shall go, no love required.

  3. star man says:

    There wouldn’t be any so-called “Tax Heavens” (Low Tax Jurisdictions) if US tax law was fair. Blame the USA, not BDA. We are just fulfilling demand.

  4. Googlybda says:

    Wake Up Bermuda!

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