By Jonathan Weisman
Washington Post Staff Writer
Prompted by a one-time tax holiday on profits earned abroad, pharmaceutical giant Eli
Lilly and Co. announced early this year that it would bring home $8 billion to boost
research and development spending, capital investments and other job-creating ventures.
months into the year, Lilly's R&D spending had increased by 10 percent. But that $134
million is only a small fraction of the $8 billion that is boosting the company's coffers.
For proponents of the tax holiday, including the corporations that lobbied for it,
Lilly proves that the tax provision is working. For skeptics, it means the opposite: A
measure designed to create jobs is instead rewarding the companies that are most adept at
stashing overseas profits in tax havens, allowing them to bring money home at a severely
discounted tax rate. Once here, that money is simply freeing up domestic profits that
would have been spent on job creation and investment anyway.
"There will be some stimulative effect because it pumps money into the
economy," said Phillip L. Swagel, a former chief of staff on President Bush's Council
of Economic Advisers, which had opposed the tax holiday. "But you might as well have
taken a helicopter over 90210 [Beverly Hills] and pushed the money out the door. That
would have stimulated the economy as well."
A well-organized business coalition, led by pharmaceutical firms and high-technology
companies, pushed hard last year to get a long-sought tax holiday into the corporate tax
bill moving through Congress, called the American Jobs Creation Act. Treasury Secretary
John W. Snow objected that the measure would unfairly benefit multinational corporations
over domestic firms, while White House economists said it would produce no substantial
But with bipartisan backing, the business groups prevailed. Most companies with
substantial cash holdings overseas have until the end of this year to bring them home at
an effective tax rate of 5.25 percent, rather than the standard corporate tax rate of 35
So far, the effects have been muted. Martin Gonzalez, a principal at Banc of America
Securities, estimated that by midyear, $30 billion to $40 billion in foreign profits had
been brought home, just 10 percent of the $300 billion to $400 billion he said could be
repatriated by the end of the tax holiday.
Pfizer Inc. has led the pack with a promised $37 billion repatriation. Procter &
Gamble Co. intends to bring home $10.7 billion, and Johnson & Johnson Inc. has an $11
billion plan. Schering-Plough Corp. could bring back $9 billion. This week,
Hewlett-Packard Co. announced it will repatriate $14.5 billion in the second half of the
year, mainly for "strategic acquisitions," said Ryan Donovan, an HP spokesman.
Robert S. McIntyre, a critic of corporate tax policy at Citizens for Tax Justice,
questioned why "strategic acquisitions" would create jobs. "Usually it
means layoffs. That's the strategic part," he said.
Of the roughly 100 companies that disclosed permanently reinvested foreign earnings
over $500 million in 2002, 20 percent announced repatriation plans in the first three
months of the year, said Susan M. Albring of the University of South Florida and Lillian
F. Mills of the University of Arizona, who are tracking the response. Fifteen percent said
such plans were likely.
Under the law and subsequent Treasury regulations, the repatriated money is supposed to
go toward hiring and training, infrastructure development, R&D, capital investments,
or other job-creating activities. None of the money could be used to feather the nests of
shareholders or bosses through executive compensation, stock buybacks or dividend
But Treasury officials warned from the beginning that such requirements were virtually
unenforceable, Swagel said.
For proponents of the policy, there may be no better example than Dell Inc., the
personal-computer maker, which said it will bring home $4.1 billion in foreign profits, in
part to build a new manufacturing plant in Winston-Salem, N.C.
But of that $4.1 billion, just over $100 million is going to the plant, which Dell says
would have been built anyway. Dell spokesman Jess Blackburn said other expenditures will
include compensation and benefits for non-executives, research and development,
advertising, marketing, and some capital investments outside North Carolina.
What it will not be used for is a $2 billion stock buyback announced April 6, two
months after the repatriation plan was announced, Blackburn said. That buyback, although
double the level initially planned for the firm's second quarter, was merely the latest in
a long series of buybacks used to boost Dell stock prices, he said.
"If we had never bought stock back and we bought stock back this year, I would
raise my own eyebrows," he said.
In June, after the release of its repatriation plan, Pfizer said it would buy back up
to $5 billion in common stock.
No one is suggesting that companies are violating the law, said Pamela F. Olson, who as
assistant Treasury secretary for tax policy opposed the provision. But the new cash from
abroad has "loosened company balance sheets," she said. Some of the new
investments would not have been made without the measure, but most of it is simply
displacing money that would have been spent anyway.
"Money is in some sense always fungible," said Jonah Rockoff, a Columbia
Another concern is the incentive the holiday may provide to tax shelterers.
Companies with operations in countries with corporate tax rates close to the U.S. rate
had nothing to gain, since they already can deduct taxes paid abroad from tax bills on
repatriated earnings. Companies with profits in tax havens with little or no corporate
income taxes stand to gain the most.
It made sense that the provision was pushed by technology and pharmaceutical companies,
because so much of their profits come from "intangible" property, such as
patents and licensing, Mills said. "The profit from a new drug for pain relief is
easier to shelter in a low-tax country than is the profit from making and selling
shirts," she said.
But such companies also have large R&D operations in the United States that could
be funded by repatriated profits.
"Companies are making the decision," Mills said. "'Would I ever have
repatriated these earnings?' If the answer is yes, they're taking it. If it's no, they
will not even want to pay a 5.25 percent rate."