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Bill Clinton Backs Tax Holiday on Foreign Profits, With Caveats

Former U.S. President Bill Clinton endorsed a tax holiday on repatriating offshore profits with conditions, taking a position contrary to the Obama administration.

“I favor it under certain circumstances,” Clinton said in an interview with Bloomberg Television’s Al Hunt yesterday in Chicago. He suggested an approach that would give companies a 20 percent tax rate on repatriated profits, which could be reduced to 10 percent if they “reinvest it in increasing employment in America.”

In a separate interview, Chicago Mayor Rahm Emanuel endorsed a repatriation holiday, which many Republicans favor, with a 15 percent rate on profits brought back to the U.S. if the tax receipts were placed in an infrastructure bank, an idea that Democrats support. The main Republican proposal in Congress includes a 5.25 percent rate and a penalty for job cuts.

“You would take two ideas that both parties have advocated singularly and combine them to solve a national problem,” said Emanuel, who was White House chief of staff under President Barack Obama and also worked in Clinton’s White House. “Now, there’s challenges to it, but that’s just one idea.”

Clinton said that approach was worth considering. He also nodded to opponents of a repatriation holiday, saying that “they have a good argument.” The former president was in Chicago for a two-day meeting of the Clinton Global Initiative, focusing on U.S. job creation.

$1 Trillion Offshore

U.S. multinational corporations have more than $1 trillion in profits outside the country that would be taxed if brought back to the U.S. Companies including Apple Inc. (AAPL), Cisco Systems Inc. (CSCO) and Pfizer Inc. (PFE) have been lobbying Congress for a tax holiday similar to one enacted in 2004.

Among the opponents of a repatriation holiday is the Treasury Department under Obama and Secretary Timothy Geithner. The Obama administration has warned that a tax holiday wouldn’t create jobs and noted the cost in forgone revenue, which is estimated at $78.7 billion over 10 years.

“Repatriation we will be happy to consider in the context of overall corporate reform,” Geithner told the Senate Finance Committee in February. “If we can do corporate reform right, we’ll have a chance to help on that front. But we’ll not support it outside the context of comprehensive reform.”

Under current law, U.S.-based companies don’t have to pay taxes on profits they earn outside the country until they bring the money home. When they repatriate the money, they face a 35 percent top corporate tax rate. They receive credits for taxes paid to other governments.

Foreign Taxes

The problem with a repatriation holiday is that companies haven’t actually paid taxes in the countries where they earned the income, said Edward Kleinbard, a law professor at the University of Southern California.

“They are advocating for completing the circle of global aggressive tax planning under which they will pay close to no tax anywhere in the world,” said Kleinbard, who was chief of staff at the congressional Joint Committee on Taxation.

In 2004, Congress allowed companies to bring money home at a 5.25 percent tax rate as long as they submitted plans for domestic investment. Studies later found that much of the money was used to buy back shares and pay dividends. The Joint Committee on Taxation estimates that a new repatriation holiday would encourage companies to move more profits offshore in anticipation of another holiday.

Clinton is the latest Democrat to express openness to a repatriation holiday, joining Senators Charles Schumer of New York and Kay Hagan of North Carolina, who both voted against a similar proposal in 2009.

Infrastructure Bank

In comments last week, Schumer linked the possibility of a repatriation holiday to an infrastructure bank.

Emanuel said yesterday that estimates of revenue losses from a repatriation holiday don’t consider the benefits of infrastructure.

Kleinbard said the potential revenue losses are real, albeit smaller if the tax rate were set higher than 5.25 percent.

“You’re starting $80 billion in the hole with repatriation, so you’re not really raising any money until you get back to zero,” he said. “So there’s no net money to go into an infrastructure bank or anything else.”

Kleinbard added that the details of how companies are allowed to use foreign tax credits against their repatriated income would be important.

Some congressional Republicans, including House Minority Leader Eric Cantor of Virginia and Representative Kevin Brady of Texas, a senior member of the tax-writing Ways and Means Committee, support a repatriation holiday.

Other Republicans, including Ways and Means Committee Chairman Dave Camp, say they would prefer to consider repatriation as part of a broader overhaul of the tax code.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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