Prospects for a short-term home-land investment package from Congress, allowing the repatriation of certain foreign earnings at a lowered tax rate, remain bright given interest on both sides of the aisle. But the provision and its exact form will have to wait until lawmakers take up international tax legislation following the winter recess.

In the meantime, U.S. firms affected by the proposal should prepare now for the repatriation window (estimated to be between six and 12 months) and consider effects the provision may have on foreign exchange and credit markets, according to Bank of America officials.

Freeing “Stranded” Money

Under current law, U.S. firms that repatriate earnings from foreign subsidiaries pay tax based on the difference between tax paid overseas and the 35 percent U.S. rate. Companies can avoid U.S. taxes on such earnings by keeping the money overseas, where many nations exclude foreign dividends from domestic taxation—further encouraging the overseas investment of earnings made abroad.

As a result, hundreds of billions of dollars in earnings remain in foreign markets, according to economists’ estimates.

Congress introduced legislation last February designed to release certain overseas earnings and provide a one-time economic stimulus back home. The Homeland Investment Act, sponsored by Rep. Phil English, R-Pa., and its sister bill, the Invest in the U.S.A. Act, sponsored by Sen. John Ensign, R-Nev., sought to reduce the tax rate on repatriated foreign earnings to 5.25 percent for one year. The break would apply to distributions in excess of a company’s normal amount, also called the base amount, calculated as the average of dividends received over five years excluding the low and high years.

The Joint Committee on Taxation first estimated that the proposal would bring an additional $135 billion of foreign earnings into the United States during a one-year period. A more recent Bank of America study places the figure as high as $400 billion.

Furthermore, a recent analysis by research economist Alan Sinai indicated that repatriation of $300 billion would increase real GDP by 0.2 percent in 2004 and up to 0.9 percent in 2005. Capital spending also would increase, Sinai concluded, and the repatriated funds would add up to 666,000 new jobs to the U.S. economy.

According to the Homeland Investment Act’s sponsors, the repatriated earnings would allow businesses to increase domestic investment in plants and equipment, as well as research and development; increase funding for pension plans; reduce domestic debt; increase dividends to shareholders; increase funds available for stock repurchases; and, ultimately, create jobs.

“As we work to get our economy moving again, we need to do all we can to encourage investment in our capital markets,” said Rep. David Dreier, R-Calif., one of the bill’s cosponsors. “Just as consumers need an incentive to invest, so do businesses.”

Despite bipartisan support, however, the House bill remained tabled in committee. The Ensign bill, having achieved a favorable 75-25 floor vote in the Senate, was attached to the jobs and growth bill being rushed to the president’s desk before Memorial Day. Prospects looked good for homeland investment at the time, although for reasons of political expediency lawmakers removed the provision at the last minute.

A New Beginning

Homeland investment was down, but not out. In late July the chairman of the House Ways and Means Committee, Rep. William Thomas, R-Calif., inserted a homeland investment provision in his international tax bill, the American Jobs Creation Act of 2003. Insiders report that this had been Thomas’s intent all along, and that his strong support for homeland investment was one reason lawmakers dropped the provision from the growth bill earlier in the year. In other words, they knew its chances of passage at a later date, under Thomas’s guidance, were strong.

The Thomas provision differed in many ways from the original English and Ensign bills, including an increase of the tax rate to 7 percent. It also placed greater restrictions on companies that might benefit from the rule change. And the maneuvering continued. Thomas dropped homeland investment from his bill during the committee’s markup period in mid-October, but only after it had been added to the Senate’s international tax bill, the Jumpstart Our Business Strength (JOBS) Act, sponsored by Sens. Charles Grassley, R-Iowa, and Max Baucus, D-Mont.

The homeland investment provision in the Senate version more closely resembles the original bills, setting a one-year window for repatriation at a one-time rate of 5.25 percent. As before, the rate would apply to dividends in excess of a three-year average.

The JOBS Act also requires that dividends be part of a “domestic reinvestment plan” approved by a company’s senior management and board of directors. Uses could include “the funding of worker hiring and training; infrastructure; research and development; capital investments; or the financial stabilization of the corporation for the purposes of job retention or creation,” according to the bill.

Passage of the overall package is more complicated now, however, because the international tax bills also contain other, more controversial provisions. Most notable among them is the WTO-mandated and much-debated repeal of the extraterritorial income (ETI) exclusion.

Is Passage on the Horizon?

Industry support and lobbying for homeland investment have flourished in recent months, particularly among high-tech and healthcare companies and their trade associations. Supporters in Congress clearly want some form of the provision, which they believe could have a dramatic economic impact, in place well before the 2004 elections. Will it happen in conjunction with the international tax bill?

Although the Thomas bill recently passed through the House Ways and Means Committee without a homeland investment provision, the Senate has delayed a vote on its sister bill, the JOBS Act, until after the winter recess. This is despite the fact that retaliatory tariffs from the EU are slated to begin January 1, 2004 if the ETI exclusion is not repealed.

Given passage of the JOBS Act in its current form following the recess, it is very likely that homeland investment will be part of the delicate Senate-House reconciliation process expected to take place next spring, according to Arnold Miyamoto, managing director and global head of Bank of America’s Risk Management Advisory Group for Global Foreign Exchange.

Because Thomas remains a strong supporter of homeland investment in the House, Miyamoto believes the provision will still have a good chance of passage at that time. The resulting one-year repatriation window would apply to a company’s first taxable year ending 120 days or more after the provision’s enactment, according to the Senate bill.

Getting Prepared

So where does that leave companies now? The delay in Congress actually gives firms more time to prepare and maximize their tax benefit during a one-year window, Miyamoto said. He recommends that companies engage in the legislative process and initiate planning.

For most firms that means considering borrowing offshore as a way of increasing the size of repatriated dividends. Yet companies should keep in mind that the large influx of foreign earnings will have significant impacts on the dollar and credit markets, Miyamoto noted.

Foreign Exchange Implications

U.S. firms would likely increase the size of their repatriated dividends by issuing debt in non-dollar currencies. This would have a positive impact on the dollar because firms would have to sell those currencies and buy U.S. dollars for repatriation.

Repatriated funds would be invested in short-term, high-quality U.S. securities before later being redeployed into other uses, Miyamoto said. Because these steps would occur in a short period, a move in the currency market could easily diminish a company’s tax break resulting from the homeland investment provision.

“From the currency side, homeland investment has very bullish implications for U.S. assets, the economy and the dollar,” Miyamoto said. “When it’s more certain about whether the legislation will pass, companies should very strongly consider hedging, because they don’t want to erode a lot of the projected tax benefits due to a foreign exchange loss.”

Credit Issues To Consider

On the credit side, passage of homeland investment would create a “massive wave” of new bond issues—mostly high-grade but some high-yield as well—both in the United States and Europe, according to Miyamoto. With the figure reaching into the hundreds of billions, he expects that euro credit market spreads will be volatile and likely to widen, with the opposite happening to credit spreads in the United States.

“For companies looking to issue debt, they need to be mindful of that, particularly if they’re looking to globally diversify their debt structure,” Miyamoto said. “They need to be mindful of the fact that the market can only absorb so much. Secondly, if they’re holders of U.S. debt, as well as non-U.S. debt, they also need to be aware of what the short-term ramifications will be.”

Looking for Help?

For assistance with these and other repatriation issues, company officials should contact their primary banker, Miyamoto said, noting that Bank of America has a large homeland investment team in place across multiple product areas. “As we get greater clarity in terms of where the legislation is headed, customers will be guided down the appropriate path,” he said.

Overall, Miyamoto remains very optimistic regarding the economic effects of homeland investment and companies’ eagerness to take advantage of its passage. “Over the past decade this is the third time that a proposal like this has come up,” he said. “This is without question the farthest it’s ever advanced. If this is passed and enacted, companies will act quickly on it.”

This article appeared in December 2003. (BA)

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

More Articles | Speaker Programs | Speaker Demo | Videos | Services

You don't have permission to view or post comments.

Quick Search

FREE Impact Analysis

Get an inside perspective and stay on top of the most important issues in today's Global Economic Arena. Subscribe to The Manzella Report's FREE Impact Analysis Newsletter today!