United States Senate PERMANENT SUBCOMMITTEE ON INVESTIGATIONS Committee on Homeland Security and Governmental Affairs Carl Levin, Chairman Tom Coburn, Ranking Minority Member REPATRIATING OFFSHORE FUNDS: 2004 TAX WINDFALL FOR SELECT MULTINATIONALS MAJORITY STAFF REPORT PERMANENT SUBCOMMITTEE ON INVESTIGATIONS UNITED STATES SENATE October 11, 2011 PERMANENT SUBCOMMITTEE ON INVESTIGATIONS SENATOR CARL LEVIN Chairman ELISE J. BEAN Staff Director and Chief Counsel ROBERT L. ROACH Counsel & Chief Investigator ALLISON F. MURPHY Counsel MARCELLE D. JOHNS Detailee MICHAEL J. MARTINEAU Detailee MARY D. ROBERTSON Chief Clerk 10/20/11 Permanent Subcommittee on Investigations 199 Russell Senate Office Building – Washington, D.C. 20510 Main Number: 202/224-9505 Web Address: www.hsgac.senate.gov [Follow Link to “Subcommittees,” to “Investigations”] REPATRIATING OFFSHORE FUNDS: 2004 TAX WINDFALL FOR SELECT MULTINATIONALS Table of Contents I. EXECUTIVE SUMMARY ................................................. 3 A. Subcommittee Review ................................................... 3 B. Report Findings ........................................................ 4 1. U.S. Jobs Lost Rather Than Gained ..................................... 4 2. Research and Development Expenditures Did Not Accelerate . 4 3. Stock Repurchases Increased After Repatriation . 4 4. Executive Compensation Increased After Repatriation . 4 5. Only A Narrow Sector of Multinationals Benefited . 4 6. Most Repatriated Funds Flowed from Tax Havens . 4 7. Offshore Funds Increased After 2004 Repatriation . 4 8. More than $2 Trillion in Cash Assets Now Held by U.S. Corporations . 5 9. Repatriation is a Failed Tax Policy...................................... 5 C. Report Recommendation ................................................ 5 II. BACKGROUND....................................................... .. 5 A. U.S. International Tax System ............................................ 5 B. American Jobs Creation Act of 2004 ....................................... 6 C. 2004 AJCA Repatriation Profile .......................................... 8 III. SUBCOMMITTEE REVIEW ............................................... 9 A. Results of the Subcommittee Survey ....................................... 9 1. U.S. Jobs.......................................................... 10 2. Research and Development Expenditures . 16 3. Stock Repurchases................................................... 19 4. Executive Compensation.............................................. 23 5. Industry Sectors Benefiting from Repatriation . 28 6. Source of Repatriated Funds........................................... 30 7. Corporate Funds Held Offshore Post-Repatriation . 33 8. Current Domestic Cash Assets ......................................... 37 9. 2004 Repatriation Did Not Achieve Intended Stimulus Effect . 39 B. Conclusion . ......................................................... 41 IV. APPENDIX . ...................................................... 42 Table 1 - U.S. Employment . .......................................... 42 Table 2 - Stock Repurchases . ........................................... 43 Table 3 - Executive Compensation . ...................................... 44 Table 4 - Dollar Value of Restricted Stock Awards for Five Most Highly Compensated Executives at Surveyed Corporations . 45 Table 5 - Dividends from Tax Haven CFCs . 50 Table 6 - Post-AJCA Accumulated Offshore Funds, 2006-2010 . 51 Table 7 - Pre-AJCA Accumulated Offshore Funds, 2000-2004 . 52 Exhibits 1. Excerpt from "Estimated Budget Effects of the Conference Agreement for H.R. 4520, The American Jobs Creation Act of 2004," revenue chart prepared by the Joint Committee on Taxation, October 7, 2004; and letter from the Joint Committee on Taxation to The Honorable Lloyd Doggett, U.S. House of Representatives, providing revenue estimates for two proposals to modify section 965 of the Internal Revenue Code, April 15, 2011. 53 2. Excerpt from Cisco System, Inc. Response To Permanent Subcommittee on Investigations Survey, 2/18/09.. ......................................... 68 3. Excerpt from Altria Group, Inc. Response To Permanent Subcommittee on Investigations Survey, 2/18/10.. ..................................................... 69 4. Excerpt from Microsoft Corporation Response To Permanent Subcommittee on Investigations Survey, 2/18/09; and Microsoft Corporation FY06 Domestic Reinvestment Plan, May 25, 2006.. .................................................. 70 5. Excerpt from Oracle Corporation Response To Permanent Subcommittee on Investigations Survey, 2/17/09; and Oracle Corporation Section 965 Domestic Reinvestment Plan, May 27, 2005.. ..................................................... 77 6. Excerpt from The Coca Cola Co. Response To Permanent Subcommittee on Investigations Survey, 2/13/09 . ..................................................... 82 7. Excerpt from The Procter & Gamble Company Response To Permanent Subcommittee on Investigations Survey, 2/26/09.. ......................................... 83 8. Excerpt from Schering-Plough Corporation Response To Permanent Subcommittee on Investigations Survey, 2/18/09.. ......................................... 84 9. Excerpt from Johnson & Johnson Response To Permanent Subcommittee on Investigations Survey, 2/24/09.. ..................................................... 85 10. Offshore tax dodging hurts U.S. business, Michigan Midland Daily News, by Paul Egerman, small business entrepreneur, June 7, 2011.. 86 11. A Charlie Brown Congress?, The Hill, by Frank Knapp Jr., president and CEO of The South Carolina Small Business Chamber of Commerce, June 29, 2011.. 88 12. Letter to Congress: No Tax Holiday for U.S. Multinationals, sent by 12 small business groups, June 14, 2011.. ................................................ 90 # # # REPATRIATING OFFSHORE FUNDS: 2004 TAX WINDFALL FOR SELECT MULTINATIONALS October 11, 2011 In 2004, the America Jobs Creation Act (AJCA) permitted U.S. corporations to repatriate income held outside of the United States at an effective tax rate of 5.25% instead of the top 35% corporate income tax rate. The purpose of this tax provision was to encourage companies to return cash assets to the United States, which proponents of the provision argued would spur increased domestic investment and U.S. jobs.1 In response, corporations returned $312 billion in qualified repatriation dollars to the United States and avoided an estimated $3.3 billion in tax payments,2 but the growth in American jobs and investment that was supposed to follow did not occur.3 1 See U.S. Congress, Conference Committee, “American Jobs Creation Act of 2004,” Conference Report accompanying H.R. 4520, H.Rep. No. 108-755, 108th Cong., 2nd sess., at 316 (Washington: GPO, 2004) (hereinafter “Conference Report”) (“[I]n order to qualify for the deduction, dividends must be described in a domestic reinvestment plan [which] . must provide for the reinvestment of the repatriated dividends in the United States, including as a source for the funding of worker hiring and training, infrastructure, research and development, capital investments, and the financial stabilization of the corporation for the purposes of job retention or creation.”). See also, e.g., 150 CONG. REC. S11038 (2004) (statement of Sen. Grassley) (“This bill contains some of the most important international tax reforms in decades, bringing foreign earnings home for investment in the United States instead of investing overseas, hence creating jobs in the United States.”); 150 CONG. REC. S4875 (2004) (statement of Sen. Graham) (“The rationale for this proposal is that reducing the tax rate will encourage U.S. multinational companies to expatriate income held offshore in order to make investments in the United States that will create jobs”); 150 CONG. REC. H8704 (2004) (Statement of Rep. Phil English-PA) (“Mr. Speaker, I particularly want to draw attention to one particular job-creating provision in this bill, which mirrors legislation I introduced and will lead to in-sourcing. This provision, known as the Homeland Investment Act, is one of the strongest stimulus proposals brought before Congress in recent years, and I think it is going to have a huge impact. It temporarily reduces the tax rate on foreign earnings of U.S. companies, when that money is brought back to the United States for investment here at home. The billions of dollars that will be brought back will be used by American employers to hire new workers, invest in top-of-the-line equipment, and build new plants right here at home, instead of in the countries where their earnings are currently stranded.”); 150 CONG. REC. H8724 (2004) (statement of Rep. Udall-CO) (“I will vote for it because it includes provisions to encourage American corporations doing business abroad to repatriate their overseas earnings for investment here at home. This has great potential to stimulate investment in new plant and equipment as well as in the research and development that support innovation, job creation, and prosperity.”); 150 CONG. REC. H4408 (2004) (statement of Rep. Eshoo-CA) (“I also strongly support the inclusion of incentives for corporations to repatriate their overseas profits which would stimulate the investment of hundreds of millions of dollars in our domestic economy”). 2 See “stimated Budget Effects of the Conference Agreement for H.R. 4520, The ‘American Jobs Creation Act,’” Joint Committee on Taxation, JCX-69-04, Item IV.22 (10/7/2004) (estimating a tax revenue