Joint Committee on Taxation Estimates Revenue Loss if Section 965 is Revived
June 2014Section 965 was enacted in 2004 to encourage U.S. multinationals to repatriate offshore funds by providing for a temporary, one-time reduced rate of tax on dividends paid by controlled foreign corporations. In light of recent estimates that U.S. multinationals now have more than $1 trillion of earnings deferred from U.S. tax in controlled foreign corporations and the desire to fund various legislative initiatives, Sen. Orrin Hatch requested the Joint Committee on Taxation (the “JCT”) to provide a revenue estimate assuming section 965 was reenacted in 2014. In a letter dated June 10, 2014, the JCT estimated that such a proposal would not raise revenue; rather it would have a revenue cost of $95.8 billion for the period 2014 - 2024.
The JCT estimates that reenacting section 965 in 2014 would increase tax revenues for 2014 and 2015; however, for the years 2016-2024, reenacting section 965 would result in a revenue loss to the U.S. fisc. This revenue estimate takes into account several factors. First, there is the reduction in revenue associated with the reduced tax liability that would be created by section 965 with respect to earnings that would be repatriated without regard to the reenactment of section 965 during the period that the reduced rate is in effect. Second, the JCT assumes that taxpayers would accelerate into 2014 distributions that otherwise would be made in later years, thus reducing tax revenues in those years. Third, the reenactment of section 965 may discourage some taxpayers from repatriating income because they anticipate that section 965, or a similar provision, may be reenacted in the future. The reenactment of section 965 also may encourage U.S. multinationals to locate additional income and investments in low-tax jurisdictions in anticipation of future tax reductions. Finally, the revenue estimate takes into account the fact that repatriated earnings may be used to pay dividends to U.S. shareholders or buy back shares of the parent company.
KEYWORD: Federal Budget
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