A:

In 2004, Congress passed the American Jobs Creation Act to create new jobs in an effort to boost the economy. One of the results of the act was the implementation of a repatriated tax break, which gave U.S. multinational corporations a one-time tax break on money earned in foreign countries.

The tax break allows foreign earnings to be taxed at a rate of 5.25%, which is significantly lower than the usual corporate tax rate of 35%. Previously, much of the earnings derived from foreign countries were not transferred back to the U.S. because multinationals can defer paying taxes on foreign earnings until they decided to send the earnings back in the form of a dividend.

Ultimately, the government's rationale is that the tax break would act as a good incentive for American multinationals to send their foreign earnings back to the U.S., and then use the earnings to create more American jobs and/or expand operations in the U.S.

Critics of the idea believe that because the companies aren't required to use the repatriated earnings for the sole purpose of American job creation (but the bill does prevent companies from using the money for executive compensation, dividends and stock investments), it is not assured that the tax break will increase job creation. Furthermore, the tax break can be seen as a reward for companies that are deferring regular repatriation of foreign earnings and a punishment for companies that regularly send money back. As a result of this, critics also worry that this act sets a bad precedent, as U.S. multinationals may see this tax break as an incentive to withhold future foreign earnings in the hope that another repatriated tax break will occur.

To learn more about taxes, see Common Tax Questions Answered and Using Tax Lots: A Way To Minimize Taxes.

RELATED FAQS
  1. How many nations must a company trade in to be considered a multinational corporation?

    Learn about the conditions a company has to meet to be considered multinational, and find out when investing in multinational ... Read Answer >>
Related Articles
  1. Insights

    What to Own if Congress Passes a Tax Holiday Next Year (MSFT, GE)

    According to Goldman Sachs, economists have assigned a 50% probability that a corporate tax reform will be implemented during 2017, given a Clinton win in November and a divided Congress.
  2. Taxes

    The Benefits Of Corporate Inversion

    Many U.S. companies have found it advantageous to relocate their headquarters rather than face the highest corporate tax rates in the world regardless of whether income was earned domestically ...
  3. Investing

    Can Trump Tax Plan Bring Back Overseas Cash? (AAPL, MSFT)

    Global tax havens may soon become an afterthought if the president-elect holds true to his promises.
  4. Taxes

    Understanding Taxation Of Foreign Investments

    Technically, any gains from foreign investments owned by an American citizen are subject to tax by the company's home country as well as the IRS. However, the Foreign Tax Credit enables you to ...
  5. Small Business

    What's a Multinational Corporation?

    A multinational corporation is just that – a corporation that operates in multiple nations, with a home office that coordinates global management. Being a multinational corporation is a complicated ...
  6. Taxes

    Get A Tax Credit For Your Foreign Investments

    The foreign tax credit provides a break on investment income made and taxed in a foreign country.
  7. Financial Advisor

    Inversions and Transfer Pricing Will Hurt the US Economy

    Corporate inversion, while it benefits large corporations, costs the U.S. economy billions of dollars in federal tax revenue. How does that affect you?
  8. Taxes

    Opinion: Trump-Branded Taxes - Another Luxury Product

    Trump's tax plan offers less and less to most taxpayers – and more and more to the top tier.
  9. Taxes

    Taxes: Who Pays And How Much?

    When it comes to taxes, the debate is endless on who pays what, especially in Congress. With no new initiatives in sight, let's take a look at who is paying now.
  10. Insights

    A Concise History Of Changes In U.S. Tax Law

    We look at how U.S. taxes have changed since their inception.
RELATED TERMS
  1. Repatriable

    Refers to the ability of an asset to be moved from a foreign ...
  2. Repatriation

    The process of converting a foreign currency into the currency ...
  3. Tax Break

    A tax break is a savings on a taxpayer's liability. A tax break ...
  4. Foreign Tax Credit

    A non-refundable tax credit for income taxes paid to a foreign ...
  5. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. ...
  6. Tax Haven

    A country that offers foreign individuals and businesses little ...
Hot Definitions
  1. Tax Liability

    The total amount of tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable ...
  2. Preferred Stock

    A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
  3. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  4. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  5. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center