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Congress examines tax holiday

Microsoft stands to gain $8.8 billion from a one year foreign profits tax holiday.A recent proposal to offer companies a short tax holiday on foreign earnings could get more serious review, according to Bloomberg.

Initially proposed by U.S. Representative Kevin Brady, a Texas Republican, the issue has been picked up by the Senate Permanent Subcommittee on Investigations. Chaired by Democratic Senator Carl Levin of Michigan, the subcommittee has committed to examining the potential costs and benefits of the proposal and plans to contact a broad range of companies in its investigation.

Revenue earned abroad cannot automatically fall under U.S. tax laws, but instead only becomes eligible as soon as the money has been brought back into the country. Given the substantial 35 percent corporate tax rate in the U.S., many corporations choose not to bring foreign profits back under most circumstances, instead choosing to reinvest the money abroad. This leads many U.S. companies to invest much of their profits abroad, potentially limiting development of the U.S. economy. As such, many argue that any amount of money that comes to the U.S. from foreign profits represents a worthwhile gain.

"No one yet has explained why a dollar of American profits left overseas is better than a dollar of American profits brought back here – for any reason," Representative Brady insisted.

Brady would reduce the corporate tax rate for returning profits from 35 percent to 5.25 percent for a period of one year. This type of tax holiday is a concept that has been used before, most recently in 2004. The San Francisco Chronicle notes that the 2004 tax holiday drew extensive criticism, as many companies used the profits to increase shareholder dividends. There were some examples of companies taking advantage of the extra funds, however, such as Cisco investing in new research and development positions. According to The Wall Street Journal, Levin plans to survey companies on their response to the last tax holiday in his investigation.

Some of the biggest supporters for the tax holiday come from Silicon Valley, including Microsoft, Apple and Google. The Chronicle notes that each of these companies stands to gain billions of dollars from the tax holiday, from the comparatively modest $3.7 billion for Apple to as much as $8.8 billion for Microsoft. Combined, proponents of the bill suggest the tax holiday could bring as much as $1 trillion into the U.S. economy.

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