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The Denver Post

Presidential Candidate Kerry Opposes Tax Code That Encourages Overseas Hiring

By Greg Griffin, The Denver Post

May 4, 2004
Copyright ©2004 Knight Ridder/Tribune Business News. All rights reserved.

May 4--Does the United States encourage companies to expand their operations abroad and hire foreign workers?

Some corporate tax experts think so, and their concerns have gained a powerful voice in Democratic presidential candidate John Kerry.

"If a company is torn between creating jobs here or overseas, we now have a tax code that tells you to go overseas," Kerry said recently in Detroit during a speech outlining his tax plan. "That's crazy. And if I am president, it will end."

At issue are tax provisions that allow U.S. corporations to defer payment on profits made outside the United States. Companies owe the standard U.S. corporate tax rate of 35 percent on those earnings only if they bring the money here.

As a result, most companies perpetually reinvest their foreign-earned profits outside the United States, an untaxed sum that's grown to an estimated $400 billion to $600 billion.

Some of that money already has been spent on factories, offices and equipment overseas. But a large portion is held by the U.S. companies' foreign subsidiaries in cash or stocks.

Often, corporations transfer these profits to holding companies in tax-haven countries, effectively shielding their foreign earnings from any taxation.

In Colorado, companies such as StorageTek, First Data Corp. and Qwest Communications hold at least $460 million in foreign earnings overseas.

Louisville-based StorageTek has the most, with $348.7 million in non-U.S. earnings. International sales account for 46 percent of the company's revenue, and most of its manufacturing is done in Puerto Rico.

"If we do have the opportunity to repatriate those earnings, depending on how it's framed, we'd be very interested in bringing a big chunk of it back," said Karla Kimrey, StorageTek's vice president of investor relations.

Foreign-earned profits are different from earnings made from exports. The money comes from manufacturing plants and operating subsidiaries that American companies own outside the United States. In many cases, the products and services created by these offshore subsidiaries are sold here.

Kerry's plan would give companies a one-year window during which they could return foreign profits earned in past years to the United States at a tax rate of 10 percent. After that, they would have to pay the full U.S. corporate tax rate on most overseas earnings in future years, whether the money is returned here or not.

The Massachusetts senator says he would use the additional tax revenue to cut the overall corporate U.S. tax rate to 33.25 percent from 35 percent.

But corporations, which have been pushing for their own "tax holiday" on foreign profits, have been tepid in their response to Kerry's plan.

Their proposal, part of a broader international corporate tax-reform bill now before Congress, would let companies bring past foreign profits into the U.S. at a 5.25 percent tax rate for one year. After that, unlike the Kerry plan, companies could continue the existing practice of deferring U.S. taxes on overseas earnings.

But the business lobby has been unable to get its biggest supporter -- President Bush -- on board. Administration officials say the tax holiday is unfair to companies that don't operate internationally.

"The administration has serious concerns about the fairness of this provision," said U.S. Treasury Department spokeswoman Tara Bradshaw. "We're skeptical of the purported economic benefits, and we believe it would undermine Treasury's ability to enforce the tax code."

From the businesses' perspective, the issue is one of economic opportunity. In light of the "jobless recovery" and controversy over offshore outsourcing, their argument goes, why not create new American jobs by letting hundreds of billions of dollars in the door?

J.P. Morgan Chase Bank estimated in a report last year that such a tax amnesty could lure as much as $300 billion to the United States and create 400,000 jobs.

The Joint Committee on Taxation, a nonpartisan Congressional agency, forecast a more modest inflow of $135 billion.

"We're talking about big money, enough to provide a significant stimulus to the economy," said Jeff Bagley, a McCabe Capital Managers portfolio manager in King of Prussia, Pa., who follows the issue. "It will never come back to the U.S. unless the laws are changed." Broomfield-based Ball Corp., which keeps an undisclosed amount of foreign profits offshore, supports the industry-backed legislation.

"From a tax-efficiency standpoint, you're encouraged to keep the money there," said Scott Morrison, Ball's vice president and treasurer. "Anything that takes inefficiency out of the global tax system would be helpful for the economy."

The industry proposal would limit how money returned at the lower tax rate could be spent -- it could not, for example, be used to increase executive compensation. Businesses could use it to expand their domestic operations, to buy back debt or company shares, or to make acquisitions.

But critics say those limitations would be difficult or impossible to enforce. They call the industry proposal corporate welfare.

Wayne Gazur, a law professor at the University of Colorado specializing in corporate taxation, said giving companies the tax break wouldn't necessarily shift employment to the U.S. from cheaper labor markets.

"I don't know if this would be enough to tip the scales for many companies," he said. "I don't know if anyone would say 'OK, we're going to do this in the United States now.' " Gazur said the U.S. government began allowing American companies to defer tax payments on their foreign-earned profits after World War II. The idea was to encourage businesses to set up operations in Europe as a form of economic assistance.

Later, it served a similar purpose in other parts of the world, including South Korea. But the political climate has changed.

"There are different foreign-policy goals right now," he said. "Now that we're concerned about the export of American jobs, they're saying, 'bring this money home.' "

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