Sunday, February 01, 2015

Foreign Profits Under Fire In US

Corporate cash looks like a big pile of potential energy to rational business leaders.  It also looks like a big prize to politicians.  The Obama Administration wants a special tax on the profits that American corporations hold in their foreign subsidiaries.  The opening gambit of Washington's latest joust over tax reform is a play for more complex administrative burdens on corporations.  The political appeal of reinvesting in America obscures the chaos awaiting in the details.

The smart way to bring foreign profits home is to apply any new tax to future earnings only.  Grandfathering all prior earnings means corporations can keep whatever capital spending commitments they have made based on sequestering non-US earnings.  The Administration does not seem inclined to move that way.  The tax proposal reads as a grab for earnings held up to today.

US corporations already pay foreign taxes on their earnings from foreign operations, and these payments are addressed in the tax codes of both the US and foreign jurisdictions.  Many US corporations also have transfer pricing agreements with foreign governments' revenue ministries.  A new tax will force them to revise these agreements.  The US would be in the unenviable position of taxing its most successful companies twice for the same operations if the Administration's opening proposal succeeds.

High-profile tax inversion mergers have become the bogeyman driving a political quest to do something superficially patriotic.  Someone needs to send a memo to the White House's economic advisers that tax inversions are rarely the sole or even primary criterion for international mergers and acquisitions.  Corporate development officers execute checklists numbering hundreds of deal criteria.  Tax considerations may be one or two questions on a pre-merger checklist.

Corporations sequester cash in their non-US affiliates to fund enterprise growth, hedge currency volatility, and pay local employees.  Unleashing a bull into a china shop leads to lots of broken crockery.  The Administration's intended tax bull will upset many carefully emplaced corporate plans.