AUGUST 1, 2005
Profits Head Homeward, But Where Are The Jobs?
When it comes to corporate income taxes, it sure pays to be a
multinational these days. U.S. companies fork over up to 35% of their
domestic income in federal taxes. But for earnings from abroad, the tax
rate is just 5.25% this year, thanks to the American Jobs Creation Act
of 2004. The election-year bill was aimed at spurring the U.S. economy
by encouraging U.S. companies with international operations to bring
home profits they had parked in lower tax countries.
The one-year tax break has clearly opened the floodgates: U.S.-based
companies are on track to repatriate upwards of $520 billion by the end
of December, estimates Henry "Chip" Dickson, chief U.S. equity
strategist at Lehman Brothers Inc. (LEH
pack. Led by Pfizer Inc. (PFE
which is returning $36.9 billion in foreign earnings alone,
pharmaceutical and biotech companies could bring $120.5 billion into
their U.S. coffers at the lower tax rate. High-tech equipment makers
such as IBM (IBM
Hewlett-Packard Co. (HPQ
next, with an estimated $62.9 billion in repatriated earnings.
But if there's little doubt the money is pouring in, figuring out
exactly where it's going is another matter. Though the bill was promoted
as a job-creation measure, regulations set by the U.S. Treasury leave
companies wide leeway in how they use their repatriated profits. Hiring,
capital investment, research and development, marketing, acquisitions,
pension funding, and debt repayment all qualify -- and companies do not
have to disclose specifics of their spending plans. They also have three
years to allocate the cash. Moreover, if a company plows its foreign
profits into research and development, for instance, it could take money
previously earmarked for research and use it elsewhere. "You can't trace
the money," points out Mickey D. Levy, chief economist at Bank of
America Corp. (BAC
Still, some companies are starting to show how they're putting their
newfound treasure to use. In June, Pfizer paid $1.9 billion for Vicuron
Pharmaceuticals Inc. (MICU
King of Prussia (Pa.) biotech firm. Pfizer also has initiated a $5
billion stock buyback -- though the company says that isn't a direct
result of the profits it's shipping home, since share repurchases aren't
allowed under the Treasury regs. But a spokesman for the New York-based
drugmaker acknowledges: "It's hard to say where money is going to and
One thing is clear, however: The money piling in from abroad as the
result of the Jobs Creation Act has done little to actually spur hiring.
In fact, six of the 10 companies repatriating the biggest totals are
axing workers in the U.S. They include HP, which announced July 19 that
it would cut its head count by 14,500 in the U.S. and abroad, and
Pfizer, which has said it will shutter 20 factories with undisclosed
U.S. job losses to lower costs by $4 billion by 2008.
Oddly, the repatriation is also cutting into profits. The reason: Even
that measly 5.25% rate means companies must pay higher taxes than they
had budgeted when the earnings were tucked away outside the U.S. Pfizer
has taken a $1.7 billion charge to cover taxes on its foreign profits in
the first half, while Merck & Co. (MRK
$1 billion if it goes ahead with plans to bring home $15 billion.
Altogether, if Corporate America returns the $520 billion that Dickson
says it could, the government could collect an extra $27.3 billion in
income taxes this year. But next year, the tax rate on overseas earnings
snaps back to 35%. Every holiday, after all, must come to an end.