What is the purpose of a "repatriated tax break", and why is it so controversial?

By Albert Phung AAA
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. What aids will help me file my own tax return?

    Most of us will shy away from doing our own tax returns, especially if it involves reporting capital gains or losses, education ...
  2. Earnings within a Roth IRA are tax free, so are these earnings included in the modified ...

    There are two possible answers to this question, depending on whether or not the distribution from the Roth IRA is qualified.Earnings ...
  3. How do I find out what my tax bracket is?

    Learn the information you need to determine what your tax bracket is.
  4. What's the difference between a tax rate and a tax bracket?

    These two terms are often incorrectly used interchangeably. Find out the difference between your tax rate and your tax bracket. ...
RELATED TERMS
  1. Peter Pan Syndrome

    A regulatory environment in which firms prefer to stay small ...
  2. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  3. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  4. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  5. AG (Aktiengesellschaft)

    AG is an abbreviation of Aktiengesellschaft, which is a German ...
  6. GmbH

    GmbH is an abbreviation of the German phrase Gesellschaft mit ...
comments powered by Disqus
Related Articles
  1. After-Tax Balance Rules For Retirement ...
    Taxes

    After-Tax Balance Rules For Retirement ...

  2. Changes In Tax Legislation And Regulation
    Taxes

    Changes In Tax Legislation And Regulation

  3. Tax Treatment Of Roth IRA Distributions
    Taxes

    Tax Treatment Of Roth IRA Distributions

  4. 10 Sources Of Nontaxable Income
    Taxes

    10 Sources Of Nontaxable Income

  5. Tax-Saving Advice For IRA Holders
    Taxes

    Tax-Saving Advice For IRA Holders

Trading Center