Microsoft, P&G Seek U.S. Tax Break for Global Profits
By Ryan J. Donmoyer
Washington, Nov. 9 (Bloomberg) -- U.S. companies such as Microsoft Corp., Procter & Gamble Co., and Pfizer Inc. are asking Congress to cut taxes on profits from overseas operations so they'd pay a rate of about 5 percent compared with current rates up to 35 percent.
The temporary tax break would return to the U.S. an estimated $100 billion in international profits, providing an infusion of capital that would spur business activity, lobbyists say. It's likely to be offered as an amendment to economic stimulus legislation on the Senate floor next week.
``It's a pretty daring proposal, but it would be effective,'' said Bill Sample, director of domestic taxes for Microsoft. ``We've been telling members of Congress the proposals advanced would certainly encourage us to repatriate money and invest it back in the U.S.''
Many multinational companies have large cash reserves overseas because they don't need the money for expansion and don't want to pay U.S. taxes of 35 percent, reduced by taxes paid to foreign governments.
The proposal surfaced Thursday as a possible amendment by New Jersey Democratic Senator Robert Torricelli to the economic stimulus bill approved by the Senate Finance Committee. Torricelli and panel members withheld most amendments until floor action.
``I think there's a serious chance the Senate might favorably consider this if it can be structured to have minimal impact'' on the federal budget, said Kenneth Kies, a managing partner at PricewaterhouseCoopers. He's lobbying for the proposal as a way for the government to raise revenue on profits companies would otherwise never allow to be taxed.
Double Taxation
``There are a lot of companies that have earnings in lower tax jurisdictions like the U.K., Ireland, Singapore, and Switzerland, that could not bring the money to the U.S. to reinvest here without having to pay an extra layer of U.S. tax,'' said Bill Chip, an international tax specialist with Deloitte & Touche LLP who chairs the European-American Business Council's tax panel.
Opponents will say that U.S. companies shouldn't relocate plants to lower tax countries in the first place, said Chip, who isn't representing any companies or lobbying on the issue.
Proponents say the U.S. policy of taxing companies on their worldwide income puts U.S. firms at a disadvantage with competitors in countries like Canada and Germany, which allow tax- free dividends from foreign subsidiaries.
``Because our international tax policy is so screwed up, we have to do something like this,'' said Rick Grafmeyer, a partner with Arthur Andersen, who is also lobbying for the change.
The top tax priority in the economic stimulus bill for most U.S. companies remains a Republican proposal to repeal the corporate alternative minimum tax, which can hit companies with a higher effective tax rate when their profits decline.
Details of Proposal
Some multinational firms, especially pharmaceutical companies and manufacturers of computer hardware and software, have stepped up lobbying efforts for the Torricelli amendment. It would exempt from tax 85 percent of dividends distributed by foreign affiliates for an eight-month period. That would result in an effective tax rate of 5.25 percent, Grafmeyer said.
``You could pretty much do anything you wanted'' with the money, Sample said. Options include buying back company stock to increase its price, paying down debt, building a plant, or hiring workers. Under discussion is whether to prohibit companies from using the money to boost dividends to shareholders. The use of the money would have to be approved by the company's board.
Billions Invested
The proposal appeals most to companies with billions in profits in countries that they have no intention of returning to the U.S. because of U.S. taxes. That includes most multinational companies, who usually list those earnings in their annual reports as ``permanently invested overseas.''
For example, Pfizer Inc. reported unremitted foreign earnings of $14 billion, while Johnson & Johnson said the amount it considers permanently invested overseas totaled $9.5 billion last year, according to documents filed with the Securities and Exchange Commission. Procter & Gamble said in SEC filings it had $9.2 billion in undistributed foreign earnings as of June 30. All of the companies said it was impractical to accurately estimate how much in tax they would pay under current law to remit those earnings to the U.S.
According to separate SEC filings, Compaq Computer Corp. said it won't return about $6.2 billion in foreign profits to the U.S. because it would pay $2.1 billion in U.S. taxes under current law. Dell Computer Corp. said it would pay $492 million in taxes to remit its foreign earnings, without disclosing the total amount. Merck & Co. reported having $10.6 billion in foreign earnings it won't send to the U.S. because of U.S. taxes, without estimating the potential tax bill.
Sample wouldn't say how much of Microsoft's foreign earnings fall into this category and the company doesn't disclose the information in its annual reports.
Companies would only qualify for the break if they have been paying U.S. taxes on some portion of their overseas income for the last three years. The amendment would require them to guarantee they will continue the same level during the next decade. Failure to honor the guarantee would trigger a retroactive 35 percent tax on whatever amount is sent to the U.S. at the lower effective tax rate.
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