The Republican tax cut bill will allow American companies to repatriate trillions of dollars of wealth that's been sitting overseas at significantly lower rates of up to 15 percent.
Or maybe not.
It appears that the largest corporations will probably never pay the 15 percent rate, which only applies to cash holdings, because they have the means to shift and reclassify their assets and obtain a lower rate of just 8 percent.
To knock their taxes even lower, experts said, multinationals could have leeway to shift foreign earnings into the 8 percent tax bracket and out of the 15.5 percent bracket.
“Even before the legislation was unveiled in November, multinationals were planning to convert cash to non-cash assets, although it wasn’t entirely clear what would constitute cash for this purpose,” said Reuven Avi-Yonah, a leading tax expert at the University of Michigan Law School.
The loophole that makes the bracket-shifting possible involves a formula for calculating how much foreign earnings are subject to the higher tax rate. The benchmark is a company’s foreign cash position, calculated as the greater of either the average of the past two tax years, or the cash balance at the end of the last tax year begun before Jan. 1, 2018.
Using Apple as an example, because it's one of the richest companies on the planet, experts estimate the company could save itself $4 billion in taxes this year using this loophole.
Critics including Nobel prize winner Paul Krugman say this the result of rushing the legislation, but it seems to me this could be a feature rather than a bug.
It strikes me that in either case, whether companies are paying a rate of 15.5 or 8 percent, that's significantly lower than a domestic rate of 21 percent and companies will have more incentive than ever to offshore as much as they possibly can. Under previous law, overseas profits would have been taxed at a standard rate of 35 percent. That may have given companies a reason to avoid repatriating their profits, but the new law will give them a reason to offshore even more of their profits. The only companies that won't have an incentive to offshore their operations will be those that don't actually pay any taxes.
If this loophole is exploited, which we have every reason to think it will be, that would clearly increase the cost of the GOP's tax bill. As far as I can recall, neither the Congressional Budget Office (CBO) or the Joint Committee on Taxation (JCT) estimated that most companies would exploit a loophole to achieve a foreign tax rate of just 8 percent.
Both offices probably would have been smeared if they had made that assumption in their scores.