U.S. senators propose tax holiday for foreign profits

By Kevin Drawbaugh

WASHINGTON (Reuters) - Multinational corporations would get a tax holiday on hundreds of billions of dollars in foreign profits under a measure proposed by two U.S. senators on Friday.

Democrat Barbara Boxer of California and Republican Rand Paul of Kentucky called for allowing businesses to pay 6.5 percent corporate income tax on foreign profits brought into the country from overseas, instead of the current 35 percent rate, which they largely avoid.

The senators framed the measure as a way to raise tax revenue that would be channeled into the Highway Trust Fund, which pays for about half of the country's transportation projects and which is running out of money.

Tax experts criticized the Boxer-Paul proposal, saying it would raise federal revenues at first, but would reduce them in the long run and encourage companies to shift more profits abroad and wait for the next tax holiday.

The senators' measure, and a similar, though more restrictive, bill in the House of Representatives, face long odds of becoming law. While the highway fund's solvency is an urgent issue, many legislators question the wisdom of using a corporate tax holiday patch that would be costly in the future and likely undermine efforts for more meaningful tax reform, analysts said.

"The Boxer-Paul plan would give these companies an incentive to stash even more profits abroad," said Robert McIntyre, director of the activist group Citizens for Tax Justice.

The proposal is the latest chapter in a long-running struggle over a tax loophole that lets multinationals avoid paying taxes on active profits that are earned abroad or that find their way offshore through profit-shifting strategies.

As long as these profits are not brought into the United States, or repatriated, no tax is due on them. Recent estimates put the total of tax-deferred foreign profits at $2.1 trillion.

"All across the country, bridges and roads are in need of repair. We can help fund these repairs by lowering the repatriation rate and bringing home money that is currently being held ... abroad," Paul said in a statement.

The Boxer-Paul plan would give companies five years to act and set limits on how they could use the repatriated profits by, for instance, putting executive bonuses, shareholder dividends and stock buybacks out of bounds for several years.

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Companies that reincorporate abroad for tax purposes in so-called inversion deals within 10 years of participating in the program would have to repay the tax incentive with interest.

The last time Congress gave corporations a tax discount on repatriating profits was in 2004 under former President George W. Bush. That tax holiday also imposed limits, but companies found ways around them. It was billed as a stimulus, but studies showed it did little to boost the economy.