Repatriation taxes are a levy enforced by the US government on corporate profits that are transferred into the country from a foreign jurisdiction. A foreign profit that is brought back to the country is normally subject to the same tax laws as other income, although there have been several attempts to create legislation that sets it apart in recent years. This type of taxation has become an important issue over the last few decades as large companies continue to expand across the globe and create subsidiaries in various countries and locales.

Taxation of Overseas Profits

Many legislators and voters in the United States have voiced concern over the rising financial stockpile held by multinational corporations in overseas holdings. By leaving the financial resources in foreign holdings, the companies essentially avoid taxation by the US government. Political leaders and policy experts have suggested using one of the three conventional types of repatriation taxation to encourage or force multinationals to bring their profits home, according to the Center on Budget and Policy Priorities. Typically, repatriation tax rates are well below the normal rate for corporate profit to encourage participation and cooperation.

Transition Taxes

Transition taxation is one of the three primary types of repatriation tax plans that have been put forth to solve the issues posed by overseas profits. This type of tax would require mandatory participation from multinationals, so they would have to pay whether they brought the money home or not. This type of tax would likely accompany a broader tax reform policy that addressed the issues of international tax avoidance. Transition taxation could provide a significant short-term economic boost that could be used to fund infrastructure or other large projects.

Stand-alone Deemed Repatriation

This type of taxation functions much like a transition tax but does not necessarily accompany a reform of the system. Stand-alone deemed repatriation would be a one-time event that compelled companies to bring income home so it could be taxed at a determined rate. Much like transition taxes, the key concerns for policy makers revolve around the ability to enforce tax laws and finding rates that optimize the government levy without encouraging avoidance.

Repatriation Holidays

The United States has some experience with repatriation holidays, although there is still fierce debate regarding the financial feasibility of this strategy. This type of repatriation taxation provides a limited window of opportunity that allows multinationals to bring home profits at a much lower tax rate than normal. The tax holiday implemented in 2004 subjected repatriated profits to a rate of 5.25%, which was less than one-fifth of the standard 35% corporate tax rate at the time. These holidays may be issued to generate funds for a predetermined cause or as part of a larger budgetary plan.

Taxation of US-based companies operating domestically is complex, but the issues surrounding the finances of multinationals can be much more convoluted. Policy makers have limited data to base their decisions on, so experimentation with taxation of foreign profit is likely to continue into the future. Any company that does business overseas should be aware of current repatriation tax laws so they can prepare themselves for potential changes in their accounting practices.