According to a corporate bill passed by Congress last year, profits from overseas subsidiaries that are brought back to the U.S. will be taxed at a rate of 5.25% for one year, instead of at the normal 35% tax rate, provided the repatriated money is used for certain purposes.
The Treasury Department last week issued guidance defining those purposes as hiring and training workers; capital investments, debt repayment including funding employee benefits, acquisition of patent and trademarks and advertising and marketing. The guidance banned the money's use for executive salaries, dividends, stock investments or tax investments.
Marjorie Rollinson, director-international tax services for the Washington national office of Ernst & Young, said the tax break and guidance point toward a rise in marketers' ad spending. She added that it's still unclear how much money will flow to the U.S. as a result of the one-time tax break or the amount of additional spending, but confirmed "money will definitely flow into the economy."
Some analysts have suggested as much as $500 billion could flow to the U.S., but others estimate that the figure is considerably smaller than that. The Homeland Investment Coalition, which includes the National Association of Manufacturers and the Pharmaceutical Research and Manufacturers of America, predicts $135 billion will flow back into the U.S.
plenty of choices
Ms. Rollinson said the guidance leaves companies with a lot of choices about how to spend any money they bring back. She pointed out that theoretically they could even qualify for the tax break if they brought the money back and spent nothing more than they originally intended to, but claimed that previously planned advertising and marketing spending was coming out of the repatriated profits.
She did expect some of the money would fund genuine increases in companies' U.S. spending activities, however, and said those would include advertising.
The Treasury Department said the spending had to be done over "a reasonable time period" without giving a specific limit.
Dorothy Coleman, VP-tax policy for the National Association of Manufacturers, predicted companies would spend the money-on something. "If you are a business and get an infusion of cash, you are going to spend it," she said.
Advertising experts have already been predicting spending this year would rise. Robert J. Coen, director of forecasting at Interpublic Group of Cos.' Universal McCann, had projected a 6.4% to $280.6 billion as rebounding telecom and computer companies joined automotive and food companies whose advertising held strong during the downturn.