Corporate tax break won't necessarily boost hiring

NEW YORK - When Kellogg Co. announced plans to bring back $1 billion in foreign profits to the United States this year thanks to new corporate tax breaks, it said it would use those funds to do such things as develop new products and explore potential acquisitions. It didn't mention directing that money toward creating jobs.

So much for all the hiring the government promised when it gave corporate America a tax holiday this year by allowing companies to repatriate their earnings from abroad at a tax rate of 5.25 percent rather than at the usual rate of 35 percent.

Cereal maker Kellogg surely isn't the only company doing with its money as it sees fit, and chances are it won't be the last.

U.S. companies do billions of dollars in business abroad, and the money they earn overseas doesn't have to be taxed by the United States until it is repatriated here. As a result, many companies haven't been quick to bring those profits back home.

That is, unless they have a good reason or a big incentive - like the one created as part of the American Jobs Creation Act that was signed into law in October.

Companies already are talking about the big bucks they plan to repatriate. Johnson & Johnson expects to bring back $11 billion, while Schering-Plough Corp. estimated its total at $9.4 billion. Among those still expected to announce they will bring back earnings from overseas include Hewlett-Packard Co., which still has $14.5 billion in foreign profits abroad.

In total, the economists at Goldman Sachs expect around $300 billion to be repatriated, though estimates from other sources range from as high as $600 billion to as low as $100 billion. As for the tax implications, revenues are forecast to rise by $2.8 billion in fiscal 2005. But over the next nine years, the U.S. Treasury is expected to lose $6.1 billion, according to congressional estimates when the bill was passed.

Lawmakers backing the "homeland reinvestment" provision last year touted the idea of lower tax rates as a way to encourage companies to repatriate their earnings, and by putting extra money into corporate coffers, the thought was that companies would increase operating and investment activity and add jobs to payrolls.

Yet the devil in all this comes in the details. When it comes to the specifics in how the repatriated funds should be used, it turns out that what is considered permissible probably won't drive too many upswings in employment at all, and in some cases, could even spur layoffs.

In fact, a Morgan Stanley survey that was released late last year found that none of the investment firm's analysts believed that any of the companies they followed would use the repatriated earnings for hiring.

So what can this money be used for? Capital investments, debt repayment, advertising and marketing all make the OK list issued by the U.S. Treasury Department, as do acquisitions - which could actually hurt hiring because companies that merge tend to slash staff when consolidating their operations.

The government also says the money can be put toward the loosely defined category deemed "financial stabilization." Analysts say that under that banner companies could use repatriated money to cover shortfalls in their pension funding levels.

In addition, the foreign profits could be used to deal with legal liabilities. That could turn out to be an especially big boon to the health care sector, which Goldman Sachs estimates will alone repatriate $100 billion. The added cash could come in handy now that many pharmaceutical companies, such as Merck & Co. and Pfizer Corp., are facing huge claims due to safety concerns over certain drugs.

When using the repatriated funds, companies aren't required to ramp up spending in the permitted areas. That means a company with a $500 million advertising budget can use repatriated money to cover those costs, which would then free up the $500 million that it had originally earmarked for advertising to do with as it pleased.

So in a roundabout sort of way, the repatriated earnings can go toward things like executive compensation, share buybacks and dividend payments - all of which aren't permitted under the government's repatriation rules.

Good luck to those investors who want to figure out what money is being spent where. Companies don't have to segregate repatriated funds from other cash.

While this is supposed to be a holiday just for taxes, it seems that it may turn out to be one for quality financial disclosure, too.