Sen. Paul Introduces Tax Repatriation Bill

May 9, 2013. Sen. Rand Paul (R-KY) introduced S 911 [LOC | WW], the "Emergency Transportation Safety Fund Act", a bill that would amend the Internal Revenue Code (IRC) to incent repatriation of profits earned by foreign subsidiaries of U.S. companies, and use some of the tax revenues collected by such repatriation for the interstate highway system, roads and bridges, and other transportation emergency priorities.

This bill would amend 26 U.S.C. § 965, titled the "Temporary dividends received deduction", which currently provides for a 85% deduction for certain "cash dividends" received by a "United States shareholder" from "controlled foreign corporations". However, Section 965, which was enacted as part of the 2004 "America Jobs Creation Act" or "AJCA", provided only a limited one time provision, to be exercised by 2006. Hence, until this section is amended, it provides no repatriation deduction.

Sen. Paul's (at right) bill would amend Section 965 by allowing it to be exercised in "any taxable year".

This bill would do nothing to otherwise reform the underlying corporate tax system in the U.S., such as by lowering the tax rate to a level competitive with other nations, or by shifting to territorial, or source based, tax.

Other proposals would allow repatriation at a low effective tax rate, but only for a short period of time, sometimes referred to as a "holiday". See for example, HR 1834 [LOC | WW], "The Freedom to Invest Act", from the 112th Congress.

That bill had 110 sponsors in the House, but was not passed by the House. See also, Subtitle E of HR 3400 [LOC | WW], the "Jobs Through Growth Act", and Section 253 of HR 6474 [LOC | WW], the "Implementation of Simpson-Bowles Spending Reductions Act of 2012 ", neither which was not passed by the House either. For more on the "Freedom to Invest Act", see story titled "Rep. Brady Introduces Repatriation Holiday Bill" in TLJ Daily E-Mail Alert No. 2,240, May 13, 2011.

For the Senate in the 112th Congress, see S 1671 [LOC | WW], the "Foreign Earnings Reinvestment Act".

Sen. Paul's bill would also change the 85% deduction to 85.7%. The significance of this is that it would produce an effective tax rate on repatriated income of just about 5%, which is round figure. That is, (1.00 - .857) x .35 = .05005.

The U.S. corporate tax system is old and outdated. Also, it imposes the comparatively high rate of 35% for net income over $10 Million. It is often criticized for making U.S. less competitive internationally, and incenting companies to locate subsidiaries outside the U.S.

Under the current IRC, U.S. companies are taxed on a worldwide basis, but allowed foreign tax credits. Also, U.S. companies can defer the tax on profits earned by foreign subsidiaries until dividends are paid to the U.S. parent company. Sen. Paul's bill would allow U.S. companies to receive dividends from their foreign subsidiaries, and receive an 85.7% deduction in tax, providing for an effective tax rate of 5%.

The argument of supporters is that it would incent companies with foreign subsidiaries to send money to the U.S., that money would be invested in the U.S., that investment would boost economic activity and employment in the U.S., and the U.S. government would collect additional tax revenues.

However, a report [95 pages in PDF] issued by Sen. Carl Levin (D-MI) on October 11, 2011, argued that the repatriation holiday created by the 2004 AJCA did not have the desired effect upon jobs and investment.

For more detailed discussions of the relevant current U.S. tax provisions, see May 21, 2013 prepared testimony [14 pages in PDF] of Stephen Shay (Harvard law school).

Sen. Paul stated at the hearing on Apple's tax practices on May 2, 2013 that "There are 70 votes right now in the Senate for having a 5 percent repatriation tax." (See, transcript.)

The bill was referred to the Senate Finance Committee (SFC). Sen. Rand is not a member.

(Published in TLJ Daily E-Mail Alert No. 2,564, May 21, 2013.)