SAN FRANCISCO (CNN/Money) -
During the 1950s and 1960s, when many of today's tax laws were initially drafted, the overwhelming majority of corporate revenues were generated within the United States.
Decades later, however, the situation is reversed. Hewlett-Packard (HPQ: Research, Estimates), for example, generates 65 percent of its revenue overseas. Intel (INTC: Research, Estimates) earns 70 percent of its revenue outside the United States.
The increasingly global footprint of American firms, combined with the protracted economic downturn, has prompted scores of technology companies to lobby for a temporary reduction in the tax rate paid when companies return or "repatriate" foreign revenues to the United States.
A loose-knit group -- which includes HP and Intel, as well as Apple Computer (AAPL: Research, Estimates), Autodesk (ADSK: Research, Estimates), Sun Microsystems (SUNW: Research, Estimates), and other firms -- has dubbed itself the Homeland Investment Coalition. Together, the members of the HIC are rallying around three separate bills in the Senate and the House, each of which would reduce the repatriation tax rate from the current 35 percent to 5.25 percent, for one year.
"The current tax structure is fairly perverse," says Harris Miller, president of the Information Technology Association of America, a Washington-based high-tech lobbying firm. "Companies are in a lose-lose situation. They're criticized if they leave earnings abroad, and they're penalized [through taxes] if they bring them to the U.S."
HIC member companies cite estimates that if the one-year reduction were enacted, it would bring an additional $135 billion back to the United States -- money that could spur some much-needed growth in the tech sector.
"Foreign earnings are going to be invested overseas if they don't come here," says Donnie Fowler, a vice president at TechNet, a Silicon Valley-based lobbying organization. "This proposal is a way for the government to get a 5 percent revenue rate on money they otherwise wouldn't get at all."
But many tax experts disagree, arguing that the proposal is ineffective and unnecessary, and that companies could use the one-year reduction in ways that won't help the U.S. economy very much.
"The argument is correct that firms leave a lot of money abroad, partly due to tax incentives," says one tax expert, who spoke on condition of anonymity. "But it opens the floodgates to an incredible amount of tax avoidance."
As is typical with tax issues, the pro and con arguments are complicated. But problems could occur if U.S. companies repatriate their foreign revenues during the one-year reduction and then quickly turn around and reinvest the money abroad once the tax break expires. That would allow firms to bring the revenue back at a time of their choosing -- say, to make an acquisition or pay down some stateside debt -- without paying any additional taxes on the money.
John Hassell, HP's director of state and federal affairs, says senators have brought up this issue during meetings, but he adds that his company doesn't want to shuttle money back and forth around the globe. "This is a great opportunity to bring cash into the U.S. economy," he says. "Under current tax policy, we won't bring the money back."
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Other tax experts question the motives of the HIC coalition, citing studies -- one published by the American Enterprise Institute and another written by Rutgers University economist Rosanne Altschuler -- that place the effective tax rate paid by corporations on foreign earnings, after accounting measures, at less than the proposed 5.25 percent.
In other words, companies can already avoid the official U.S. tax rate on repatriation. According to these studies, the effective repatriation tax rate paid by corporations is between 1.5 and 4 percent.
So what to do? All the independent experts I interviewed agree that America's current tax policy on foreign earnings needs to change. Yet they add that the reworking is best done as part of a permanent tax policy reform, and not as an ad hoc, temporary maneuver shoehorned into a broader budget package. Such a move may provide tech companies with a much-needed boost. But it's a hokey way to devise a tax policy.
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