QC Newsletter

October 12 , 2009

Where's My Tea?

You may recall our discussion in the June newsletter about taxes on international profits generated by U.S.-based multinationals. Our concern was that we were heading in a direction likely to impede the competitiveness of U.S. companies. Too much pain for only a modest acceleration of tax revenues.

As it is now, controlled foreign corporations can transfer money between offshore subsidiaries without triggering U.S. taxes. Before this was allowed, "…American companies operating in global markets were disadvantaged in relation to their foreign competitors because redeploying active overseas income from one foreign affiliate to another meant triggering U.S. tax," those firms and several others wrote to Senate Finance Chairman Max Baucus and ranking member Charles Grassley last year. "Our principal competitors from foreign countries do not pay this tax. The look-through rule is crucial for American companies to be able to redeploy foreign earnings in foreign markets competitively."*
Well, seems like the Administration has re-considered changing the look-through rule, at least for now. A recent WSJ editorial cited effective lobbying by U.S. multinationals, particularly those in the electronics industry, as causing a “climbdown” on the issue.

My own view is that it probably became clear within the administration that changing this was not a good plan in the first place. It only served to pull in some deferrals and made offshore operations of the U.S. firms less competitive. This would only prove to shift business to overseas-based competitors, yielding fewer tax collections and probably fewer U.S. jobs ultimately.

Thinking further about it, consider the implications to the “domestic” auto industry with its massive operations cross-borders in Canada and Mexico. Perhaps as the biggest owner of the U.S. car companies, the government thought twice about what the proposal might have done to them and their share values.

Tea anyone?

Turning to the broader economy, we had some good economic news since last month. GDP increased by about 3.5% for the quarter. In normal times, that would, by itself, be a very nice performance. Coming as it did after several brutal quarters of contraction, however, it has to be considered “modest.” But with leading indicators ahead, purchasing managers’ index (ISM) advancing, and unemployment rates at least decelerating, maybe by spring we will indeed see some green shoots.

Further anecdotal evidence comes from some of our suppliers who are now beginning to stock out of parts that have been in robust supply until recently. We’ve also seen lead times going out as producers run through stock and are reticent to add materials and staff back too quickly. That’s generally good news (although a pain in the neck when you need the stuff now) and at least seems directionally consistent with the macro numbers.

All that said, don’t throw away your winter gear yet. We may still need a good hot cup of tea to keep warm.

* Congress Daily & Congress Daily AM Edition
15 June 2009
By Peter Cohn

--Jeff Cosman