Higher rate than expected on offshore earnings

Earning companies hold offshore as cash, equivalent, taxed at 15.5%

The top tax rate that US companies would pay on an estimated $3.1 trillion (€2.6 trillion) in earnings they’ve stockpiled overseas crept up to 15.5% in the final version of the GOP tax bill released Friday.

President Donald Trump had initially called for a top rate around 10% for companies’ offshore profits, but as GOP lawmakers searched for revenue to offset the cost of other tax cuts, one of the sources they settled on was multinationals’ offshore cash.

Under the GOP tax plan that’s headed for votes in the House and Senate next week, earnings that companies hold offshore as cash and cash equivalents would be taxed at 15.5%.

Income invested in less-liquid assets – including plants and equipment –would be taxed at 8%. Both taxes would be mandatory, not optional.

Multinationals “will scream” about the higher rate for cash, said Michael Mundaca, co-leader of the Ernst & Young Americas Tax Center and a former top Treasury tax official. Companies will immediately begin looking for ways to get their cash into the lower, 8% bucket, he said, though “that’s also high.”

Setting the rates at those levels would generate about $40 billion more than if the rates were 14.5% and 7.5% , as proposed in the Senate bill that was approved December 2.

Under current law, companies can defer paying US income taxes on their foreign earnings at the corporate rate of 35% until they return, or “repatriate,” them to the US The deferral provision has led companies to stockpile those earnings overseas.

Republicans say the “deemed repatriation” tax imposed by the GOP bill would clear the way for many of those companies to bring their earnings back to the US.