Whitman Expert Sees American Jobs Creation Act as Boon for Repatriation

Newswise — As business becomes more globalized, U.S. companies are increasingly earning significant amounts of income in foreign countries. The American Jobs Creation Act provided a temporary reduction in the repatriation tax with the intention of motivating firms to bring monies back to the U.S. for domestic investment. But did the firms that were Congress’ intended targets of the American Jobs Creation Act benefit the most?

Recent research by Susan Albring, assistant professor of accounting in the Whitman School of Management at Syracuse University, examined whether private and public debt constraints faced by a firm influence the firm’s response to the temporary reduction in repatriation taxes.

Albring’s research, presented in 2010 at The Journal of American Taxation Association (JATA) conference, and forthcoming in The Journal of American Taxation Association, co-authored with Lillian F. Mills, professor at the University of Texas at Austin, and Kaye J. Newberry, professor at the University of Houston, shows that external debt constraints played an important role in determining U.S. multinationals responses to the tax holiday on repatriated income.

The U.S. international tax system uses a credit system whereby foreign earnings repatriated to the United States are subject to U.S. tax, but multinationals receive an offsetting tax credit for foreign income taxes paid on the earnings. If the foreign income is earned in a country with tax rates lower than the U.S. rate, the system results in an incremental U.S. tax, or a repatriation tax. Repatriation taxes create incentives for multinationals to leave excess foreign earnings abroad through investment in financial assets.

“The response to the tax holiday was overwhelming, with estimates of $312 billion being repatriated under the holiday,” says Albring.

U.S. multinationals with greater access to public debt markets and fewer financial covenants in their private debt contracts repatriated significantly more of their eligible funds. Results suggest that these firms have more flexibility to time their repatriations—or foreign generated profits that are brought back to the U.S. at a lower tax rate—around a tax holiday, making them the primary beneficiaries of any tax savings.

“It is unlikely, however, that these firms were the intended target of The American Jobs Creation Act, given the stated legislative goals of directing repatriated funds towards financial stabilization and previously unfunded positive return investments,” says Albring.

The findings of this research provide insights regarding the policy implications of repatriation tax holidays and raise issues for further study. For example, firms lobbied the Senate Finance Committee in 2008 for a second repatriation tax holiday (Economic Stimulus of 2008 debates). This research suggests that repeated amnesties would primarily benefit firms with sufficient financial slack to avoid the tax costs associated with ongoing repatriations.

Susan Albring’s other current research is focused on the impact of mandatory disclosure on managerial financing decisions involving debt and equity. She is also examining the effect of disclosure on firm cash policy. She is a member of the New York State Society of Certified Public Accountants and the American Institute of Certified Public Accountants. Prior to joining academe, Albring was a senior tax consultant at PricewaterhouseCoopers in New York City.