Bring Back, Bring Back, Oh Bring Back Your Earnings to Me: A Look at the New Tax Bill and Its Repatriation Provision

by Alyssa Depew, Senior Associate


On December 22, 2017, President Trump signed into law Public Bill 115-97 (“Tax Bill”).[1] Commonly known as the “Tax Cuts and Jobs Act,” the Tax Bill represents the most dramatic change to the Internal Revenue Code since the passage of the Tax Reform Act of 1986. Contrary to the 1986 Act,[2] the Tax Bill was the product of a “deeply partisan and largely closed-door process.” [3] Among the many policy changes in the Tax Bill, the one-timed deemed repatriation tax has many multi-national entities examining the potential consequences of moving foreign money back to United States (“U.S.”) soil.[4]

What Is a Repatriation Tax, and Why Would a Tax Holiday Matter?

The United States does not tax active earnings of foreign subsidiaries of U.S. multinationals on a current basis but instead defers taxation until they are actually repatriated to the U.S.[5] Under current law, multi-national companies that wish to bring back accumulated cash or illiquid earnings to the U.S. are subject to tax at the corporate rate, previously set at 35%.[6]

The Tax Bill provides a one-time deemed repatriation tax on accumulated, untaxed earnings of foreign corporations, equal to as low as eight percent of the net tax liability for each of the first five years.[7] Even with the corporate rate now being lowered to 21%,[8] an eight percent liability is extremely attractive to a firm that has accumulated large amounts of cash overseas. It is estimated that Fortune 500 corporations hold more than $2.6 trillion of “permanently reinvested” profits offshore and, subsequently, are avoiding up to $767 billion in U.S. federal income taxes.[9]

Wait a Minute, Haven’t We Done This Before?

This isn’t the first time that a repatriation provision has been enacted. The American Jobs Creation Act of 2004 (“AJCA”) provided a one-time tax holiday on the repatriation of foreign earnings by U.S.-based multinational enterprises.[10] Although Congressmen argued that it would create more than 500,000 jobs in 2 years by raising investment in the United States, the White House’s Council of Economic Advisers stated that the repatriation provision “would not produce any substantial economic benefits.”[11] The U.S. Treasury Department issued explicit guidelines on how earnings returned to the United States could be spent. The funds had to be used for “permitted investments,” which included hiring U.S. workers, U.S. investment, research and development, and certain acquisitions.[12] Certain uses, such as executive compensation, dividends, and stock redemptions, would disqualify repatriations from the holiday.[13]

Was the 2004 Tax Holiday a Success? Depends On Who You Ask.

After the AJCA went into place, economists explored the effectiveness of its repatriation provision by combining data from surveys conducted by the U.S. Bureau of Economic Analysis. The first survey used was the Survey of Direct Transactions of U.S. Reporter with Foreign Affiliate, which provides information on annual repatriations from 1996 to 2005 by U.S. multi-national entities.[14] The second survey was the Survey of U.S. Direct Investment Abroad, which captures financial and operating information for both the parent companies and foreign affiliates of U.S. multinationals.[15]

The finding made by Dharmapala et al.was that $0.60–$0.92 per repatriated dollar was spent in shareholder payouts in 2005 and subsequently not one of the permitted investments. The study claimed to show that the treasury guidelines given were “ineffective in achieving [the] specific goals” of the tax holiday.[16] The estimates from the study implied that firms returned almost all of the repatriated cash to shareholders but not necessarily that firms violated any of the provisions of the AJCA. Rather, the estimates supported the fact that because cash is fungible, a tax policy that “reduces the cost of accessing a particular type of capital will have difficulty affecting how that capital is used.”[17]

The previous finding generally has been accepted in academic circles and consequentially has impacted the debate regarding international tax reform, primarily by causing concern that corporations are likely to violate any spending requirements Congress may tie to future tax holidays.[18] The claims made by Dharmapala et al., however, have not gone entirely without criticism. Recent work by Brennan shows that although the results of the previous finding may provide useful information about “the typical firm in the subgroup of firms they identify,” the claims made regarding the expenditure of the typical dollar from all repatriations are “inaccurate and misleading.”[19]

The basis for Brennan’s criticism lies in the interpretation of the research results. Specifically, that heterogeneity in the data is not taken into account, and therefore, inferring results “for a typical firmin a subgroup to a typical dollar for the large group” is inaccurate.[20]Further, Brennan’s results show that for the 20 largest firm repatriations, firms spent $0.72 per repatriated dollar on uses permissible under the AJCA, with the remaining $0.28 paid out to shareholders.[21]In extending the analysis to non-top-20 firms, firms spent $0.59 per repatriated dollar on uses permissible under the AJCA—contrary to previous findings.[22]

So What Can We Anticipate from Another Tax Holiday?

Although there is no doubt that the Tax Bill makes dramatic and far-reaching changes to U.S. international tax policy, it is unclear how effective the repatriation provision will be in terms of stimulating economic investment based on conflicting analysis on previous tax holidays. What is clear, however, is that major U.S. firms are planning to take advantage of the provision. Most notably, Apple announced plans to bring the vast majority of its $252 billion in cash held abroad back to the U.S., paying a one time tax of nearly $38 billion, along with Cisco Systems planning to bring back $67 billion held overseas.[23] What ultimately happens to the repatriated funds—whether used for innovation and investment or rather distributed to shareholders—is to be determined.

[1]Tax Cuts and Jobs Act, Pub. L. No. 115-97 (2017) (providing for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018).

[2]On the contrary, the Tax Reform Act of 1986 was the product of years of bipartisan negotiation. David E. Rosenbaum, The Tax Reform Act Of 1986: How The Measure Came Together; A Tax Bill For The Textbooks, N.Y. Times (Oct. 23, 1986), [].

[3]Samuel A. Donaldson, Understanding the Tax Cuts and Jobs Act(Jan. 3, 2018), [].

[4]Lisa Marie Sagarra, Apple Leads These Companies With Massive Overseas Cash Repatriation Tax Bills, Fortune (Jan. 18, 2018), [].

[5]Foreign subsidiaries of U.S. multinationals are not domestic corporations and therefore are not subject to U.S. taxation on their foreign (non-U.S.) source income. I.R.C. § 7701(a)(5) (2012). Without special rules, such earnings are subject to U.S. taxation only on their repatriation to the United States mainly through dividends but also through interest, royalties, or other payments to the U.S. parent or other U.S. affiliates. Id.§ 61(a).

[6]Tax Cuts and Jobs Act, Pub. L. No. 115-97, § 13001(b)(3)(A)(i) (2017).

[7]Perspectives,Shearman & Sterling (Dec. 21, 2017) []. The earnings held as “cash or cash equivalents” are taxed at a rate of 15.5%, and all other earnings are taxed at a rate of 8%. The tax rates on the one-time deemed repatriation are achieved by providing the U.S. shareholder a deduction in the amount necessary to achieve 15.5% and 8% net rates. Id.

[8]Tax Cuts and Jobs Act, Pub. L. No. 115-97, § 13001(a) (2017).

[9]Fortune 500 Companies Hold a Record $2.6 Trillion Offshore, Inst. on Taxation and Econ. Pol’y (Mar. 2017), [].

[10]American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418.

[11]Glenn R. Simpson & Gregory Zuckerman, Tax Windfall May Not Boost Hiring Despite Claims; Some Companies Plan to Use New Break on Foreign Profits for Debt and Other Needs, Wall St. J.(Oct. 13, 2004), [].

[12]Dharmapala et al., Watch What I Do, Not What I Say: The Unintended Consequences Of The Homeland Investment Act , 66J. ofFinance 753, 756 (2011).


[14]Direct Investment Surveys: BE-577, Direct Transactions of U.S. Reporter With Foreign Affiliate, Fed. Register, (last visited Feb. 19, 2018) [].

[15]International Surveys: U.S. Direct Investment Abroad,Bureau of Econ. Analysis, (last visited Feb. 19, 2018) [].

[16]Dharmapala,supra note 12,at 783.


[18] See generally Thomas J. Brennan, Where the Money Really Went: A New Understanding of the AJCA Tax Holiday, Nw. Law & Econ Research Paper No. 13-35 (2014).

[19]Id. at 41. See generallyMartin A. Sullivan, New Insight on Repatriation Holiday Not a Game Changer, Tax Analysts (Sept. 2, 2013), [].

[20]Brennan, supra note 18, at 41(emphasis added).

[21]Id. at 34–39, 41.

[22]Id. at 38–40.

[23]Cisco to Repatriate $67 Billion Under New Tax Law, N.Y. Times (Feb. 14, 2018), [].