Repatriate Games: Room for Reinvestment

To qualify for a special low tax rate, companies will have plenty of leeway when reinvesting repatriated funds in U.S. business activities.
Stephen TaubJanuary 17, 2005

With a special one-year tax break, the Department of the Treasury is giving U.S. companies with overseas operations a lot of leeway in repatriating and spending profits earned abroad.

A provision in the 2004 American Jobs Creation Act, signed into law last October, allows companies to deduct 85 percent of repatriated funds; a company subject to the 35 percent corporate tax rate on the balance would effectively pay 5.25 percent on the total amount. To qualify for this rate, however, the company must plan to reinvest the repatriated funds in U.S. business activities.

Under the Treasury Department’s guidance, released late last week, those activities include any of the following:

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• Hiring and training workers;
• Infrastructure and capital investments;
• Research and development;
• Financial stabilization (including repaying debts and funding qualified benefit plan obligations) to retain or create jobs in the United States;
• Certain acquisitions of business entities;
• Advertising and marketing;
• Acquisition of intellectual-property rights.

Uses to which the repatriated funds may not be put include:
• Executive compensation;
• Intercompany transactions;
• Dividends and other shareholder distributions;
• Stock redemptions;
• Portfolio investments;
• Debt instruments;
• Tax payments.

Companies are not required to trace or segregate the repatriated funds, the Treasury Department pointed out; they simply must demonstrate that an amount equal to the total of repatriated funds is invested under the domestic reinvestment plan. Those investments can be made over a “reasonable” period of time, perhaps as long as several years, according to tax officials cited by The Wall Street Journal.

Greg Kelly of Susquehanna Financial Group said in a report that technology and pharmaceutical companies “are towards the top of the list of companies that stand to benefit the most from this legislation,” added the Journal.

The provision generally applies to the first taxable year beginning on or after the law’s October 22, 2004 enactment, which means 2005 for calendar-year taxpayers.