Corporations Use Tax Break to Finance Acquisitions Instead of Creating Jobs

As Congress had intended when passing the one-time tax break on foreign profits, American companies are bringing in billions of dollars from overseas to invest in the US economy. However, instead of using this money for job creation, several companies are planning to use it for acquisitions that will result in job losses. The tax break, part of the American Jobs Creation Act, allows companies to bring foreign profits into the US at a 5.25% tax rate, significantly lower than the normal corporate tax rate of 35%. Companies like Hewlett-Packard, Kellogg, and Procter & Gamble are among those who plan to use the tax break to finance their purchases of other companies, potentially leading to job losses.

Key Takeaways:

• The American Jobs Creation Act's tax break on foreign profits is intended to encourage job creation in the US, but many companies are using it to finance acquisitions instead.
• Companies like Hewlett-Packard, Kellogg, and Procter & Gamble are planning to use the tax break to buy other companies, potentially leading to job losses.
• Pharmaceutical companies, such as Pfizer, Eli Lilly, and Johnson & Johnson, are also expected to use the tax break to finance their financial dealings.
• Industry analysts are skeptical that companies will use the tax windfall to create new jobs or expand their operations.
• Companies can use the repatriated foreign profits to acquire other companies, pay down debt, buy patents, cover litigation costs, or finance sales and marketing expenses.
• The Treasury Department has ruled that companies cannot use their repatriated foreign profits to pay dividends or support stock repurchase plans.
• Many industry analysts believe that companies might use the tax windfall to indirectly finance share buybacks.

Statistics:

• American companies have accumulated at least $400 billion in profits outside the US, deferring corporate taxes on those profits as long as they were kept abroad.
• The tax windfall from the law is expected to be in the tens of billions of dollars, with Pfizer, Eli Lilly, and Johnson & Johnson alone announcing plans to bring back up to $75 billion in foreign profits.
• 7.2 billion (average annual profits held abroad cited by the source)
• 35% (normal corporate tax rate)
• 5.25% (tax rate on foreign profits)
• $3 billion (Oracle Corporation's foreign profits that can be brought back to the US)
• $10.3 billion (Oracle's purchase price for PeopleSoft)
• 5,000 (people expected to be reduced from the combined work force of Oracle and PeopleSoft)

Sources:

• [The New York Times]
• Citizens for Tax Justice (a labor-backed research group that scrutinizes corporate tax practices)
• Bernstein Research (a pharmaceutical analyst firm)
• Lehman Brothers (an investment bank)
• Oracle Corporation
• Hewlett-Packard
• Kellogg
• Procter & Gamble