By Jim Puzzanghera and Mark Schwanhausser, Mercury News
WASHINGTON - A trove of money belonging to large multinational U.S. companies such as Hewlett-Packard, Intel and Oracle -- as much as $600 billion -- sits buried in foreign countries around the world. Many in Congress want to lure it back to America to boost the recovering economy.
The plan is simple. Slash the tax rate for one year on the foreign profits if these companies bring them back to the United States.
Winning the tax break -- one of the technology industry's top priorities -- would be a boon to U.S. companies with large sales around the globe. Silicon Valley giants HP, Intel, Cisco Systems and Oracle alone have a total of $27 billion parked overseas.
The plan has strong bipartisan support in Congress, but also many skeptics. Supporters say the so-called tax holiday would give struggling Silicon Valley and the national economy a boost: a huge infusion of cash that companies could use to build factories, hire workers, fund research and bolster their finances.
"It is a money-maker for the federal government because this money is never coming back," said Sen. Barbara Boxer, D-Calif., one of its leading advocates. "It would be a huge boost to us in California and in the country."
Currently, multinational companies park profits offshore for the same reason millions of Americans save in an individual retirement account: They can defer taxes. When companies turn a profit overseas, they pay tax immediately to the foreign government involved. But if that government charges less than the 35 percent U.S. rate, companies can defer the difference they would owe at home as long as they keep the money offshore.
The proposal, which earned the support of 75 of 100 U.S. senators the last time it was voted on in 2003, would slash the U.S. corporate tax rate to 5.25 percent for one year, drawing an estimated $135 billion to $300 billion back into the economy.
Silicon Valley and other industries have pushed unsuccessfully for such a tax break for years. Now the proposal has new life because it's part of a complex corporate tax bill in the U.S. Senate designed to settle a tariff dispute with the European Union (news - web sites).
But the economic impact of the proposal is unclear.
Congressional supporters and corporate lobbyists say the infusion of money would create jobs and temporarily boost tax revenues. Moreover, companies say they would use the cash windfall to reduce debts, stoke underfunded pensions, fund risky research and boost dividends to investors.
But skeptics -- including Bush officials -- say the economic stimulus would be muted and temporary.
"The administration has serious concerns regarding the fairness of this provision. American corporations with foreign income understood the tax laws when they invested in foreign countries," said Tara Bradshaw, a public-affairs officer for the U.S. Treasury Department (news - web sites).
Still, the Bush administration notably has not threatened to veto the corporate tax bill if it passes with the foreign-earnings provision intact. Senate Finance Committee chair Charles Grassley, R-Iowa, predicted last week that the provision would remain in the bill, currently stalled over unrelated issues.
Some experts, however, believe that would be a mistake. They say the tax holiday could induce companies to steer even more investments and jobs overseas after the tax break expires.
Among the questions being debated:
• How much will it cost? Congress' bipartisan Joint Committee on Taxation has estimated that the plan would trigger $2.7 billion in tax revenues in its first year. But like the jolt of sugar from a candy bar, the boost would be short-lived. Because companies would otherwise bring back, or "repatriate," some of their overseas profits at the 35 percent rate, the federal government would lose an estimated $3.8 billion in tax revenues over 10 years.
• Would the job creation be worth the cost? Supporters say the measure would create more than 600,000 jobs over five years. But critics say the potential cost of the measure in lost tax revenues doesn't warrant what amounts to barely double the number of new jobs created last month alone.
"I don't think it has anything to do with stimulus. That's economic nonsense," said Professor Michael J. McIntyre, a tax-policy expert at Wayne State University Law School in Detroit. "It's about not paying the tax."
• Would it help the companies that need it most? The tax break wouldn't help domestic companies that don't invest abroad, medium-size companies that don't hold significant profits offshore or start-ups struggling to turn profits. Even among the valley's 20 largest companies, Calpine, CNF, Maxtor, Ross Stores and Knight Ridder would not benefit directly.
"It's not clear to me that the guys who would bring the funds home are the guys who need the funds," said Christopher Hennessy, a finance professor at the University of California-Berkeley Haas School of Business.
• Could it encourage companies to shelter even more money in the future? U.S. companies have piled up profits offshore for a variety of reasons, both legitimate and dubious. Some companies operate overseas factories. Some sell their goods through foreign subsidiaries. Some have acquired or merged with profitable overseas partners. And some play accounting games between the U.S. parent and foreign subsidiaries to stash profits in tax-haven countries.
Critics say the legislation would do nothing to change either the reasons to invest or park profits abroad.
"It's a pure gift to corporate America," said Rep. Pete Stark, D-Fremont, who opposes the tax holiday.
Contact Jim Puzzanghera at jpuzzanghera@ krwashington.com or (202) 383-6043. Contact Mark Schwanhausser at mschwanhausser@ mercurynews.com or (408) 920-5543.
