The Paradise Papers Could Provide an Impetus for a Tax Holiday
The Paradise Papers cast a spotlight on the increasingly vast hoard of cash that U.S. companies are stockpiling offshore to avoid a tax hit.
Leaked from international tax firm Appleby Global, the documents detail the steps that companies such as Apple (AAPL) - Get Apple Inc. (AAPL) Report , with a quarter of a trillion dollars outside the U.S., and others take to reduce exposure to tax bills. They also raise the question of whether the Trump Administration can pass a tax package that includes a holiday on overseas cash--or come up with another policy to bring funds to the U.S.
"I do think the Administration is sympathetic and empathetic with the competitive constraints around the U.S. tax code and may be [compelled] to use the Paradise Papers, as it were, as justification for moving forward and making the U.S.'s tax policies less disadvantageous for corporations," said Fitch Ratings analyst Jason Pompeii.
TheStreet Recommends
"Tax reform should relieve some of the pressure, but probably not all of the pressure to be clever to minimize your taxes," he said, though it would not eliminate the process. "Minimizing taxes is part of what corporations do and they will continue regardless of whether we have tax reform or not."
Apple maintains that it gives the tax man his due.
"Apple is the largest taxpayer in the world, paying over $35 billion in corporate income taxes in the last three years," that company said in a press release Monday. "Apple pays taxes in every country where we sell our products."
The company said its global tax rate of 24.6% is above average.
"When a customer buys an Apple product outside the United States, the profit is first taxed in the country where the sale takes place. Then Apple pays taxes to Ireland, where Apple sales and distribution activity is executed by some of the 6,000 employees working there. Additional tax is then also due in the U.S. when the earnings are repatriated." - Apple
If Trump and Congress enact a tax holiday, Pompeii suggested that companies would participate. Much of the funds would likely go to debt repayment and to shareholder returns via stock buybacks or dividends, he added.
The 2004 tax holiday under President George W. Bush tried to steer repatriated funds to hiring, R&D and other forms of domestic investments, and to thwart use of the cash on share buybacks and dividends.
The Senate Permanent Subcommittee on Investigations -- then controlled by Democrats -- found in a 2011 report that the Bush holiday "allowed U.S. companies to bring $312 billion in offshore earnings back to the United States at an extraordinarily low tax rate (and) did not produce any of the promised benefits of new jobs or increased research expenditures to spur economic growth."
The U.S. Treasury suggested that companies found ways to skirt the restrictions on dividends and buybacks.
"In assessing the 2004 tax holiday, the nonpartisan Congressional Research Service reports that most of the largest beneficiaries of the holiday actually cut jobs in 2005-06 -- despite overall economy-wide job growth in those years -- and many used the repatriated funds simply to repurchase stock or pay dividends." - U.S. Treasury
"The reality is that cash is fungible so you can say you can't use that cash for shareholder returns but that doesn't mean you can't use this cash," Pompeii said. "It's difficult [for tax policy] to funnel that cash and direct it exactly where you want it."
Apple is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AAPL? Learn more now.
More of What's Trending on TheStreet:
