2008-12-02
There are many reasons to like Ireland. It is a beautiful place to visit and to live. It has an educated, English-speaking population and many other valuable attributes. From a tax perspective, many companies in Ireland enjoy a local income tax rate of no more than 12.5%. This contrasts with combined U.S. federal and state corporate income tax rates of as much as 40% or more.
A low foreign income tax rate is especially attractive for publicly traded companies that can indefinitely keep their earnings outside the U.S. For earnings per share (“EPS”) purposes, companies in these circumstances calculate tax expense on their foreign earnings based only on the foreign tax imposed.
For instance, if $100 of pre-tax earnings is earned in the U.S., the federal and state tax expense could be $40 or more. Thus, only $60 of earnings would be reported to shareholders for EPS purposes. If it is possible to shift that $100 of pre-tax earnings to Ireland (and to indefinitely keep the earnings out of the U.S.), the tax expense for that income for EPS purposes declines to $12.5. In this case, $87.5 of earnings would be reported to shareholders for EPS purposes. By merely shifting the location of the income from the U.S. to Ireland, EPS for that item of income has increased by 46%.
The more profit that can be shifted to Ireland, the bigger the benefit. Even better, some companies are able to shift profits to zero tax jurisdictions. In these circumstances, the outsourcing of U.S. jobs provides a 67% increase in earnings per share for the profits outsourced.
Theoretically, the foreign earnings will be subject to U.S. tax (for book purposes and for tax purposes) when repatriated to the U.S. However, there can be all sorts of ways to utilize the cash earned outside the U.S. Foreign acquisitions is one example. In fact, foreign acquisitions may be “cheaper” than U.S. acquisitions because U.S. acquisitions require the cash to be repatriated to the U.S., thereby triggering a tax cost.
Even with foreign acquisitions and other strategies to utilize the foreign cash, some companies build up large amounts of cash outside the U.S. In 2004, however, Congress came to the rescue with the enactment of Code § 965. Under this new provision, these companies were allowed to repatriate cash to the U.S. during a window period where they could deduct 85% of the dividends received. During this window period, approximately $312 billion was repatriated to the U.S.
Undoubtedly, many of the same companies have again built up foreign cash and are yearning for another gift from Congress.