A New Loophole

A tax break on repatriated earnings aimed at job creation is saving U.S.-based companies money. There are no rules, however, requiring those saving...
Kate O'SullivanFebruary 24, 2005

What’s in a name? Not much, apparently, when it comes to the American Jobs Creation Act, which features a provision that may actually encourage layoffs.

Signed into law in October 2004 by President Bush, the goal of the legislation was to create jobs by offering tax breaks to U.S.-based companies. For multinationals, those breaks include a one-year tax holiday during which companies could repatriate their overseas earnings at a much lower rate — 5 percent versus 35 percent. The problem? There are no rules specifically earmarking those savings for new jobs back home.

Not surprisingly, the act has had wide appeal. Diversified manufacturing company 3M, for example, announced in its November 1 10-Q that it will likely repatriate approximately $800 million in 2005. The H.J. Heinz Co. was more vague, citing in its late November filing a range between zero and $1 billion. And food and tobacco company Altria Group Inc. is exploring its own plans.

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Economists at J.P. Morgan Chase & Co. predict that the tax holiday could yield as many as 600,000 new jobs. But without specific guidance, the repatriated amounts may be used to pay down debt or buy back stock, moves that might create jobs only as a side effect by potentially strengthening companies’ finances. In fact, 46 percent of the 28 companies surveyed by JPMorgan Chase planned to use the funds to pay down debt. “For better or worse, Congress has enacted a law that really doesn’t require much in terms of how the money would be spent,” says John M. Peterson Jr., a partner at Baker & McKenzie LLP in Palo Alto, Calif.

There are many possibilities. For example, a firm could use repatriated funds to pay for research and development, but it would not need to increase its existing R&D budget incrementally, and instead could buy back stock. Then there is the worst-case scenario: a company might be able to use the funds to finance an acquisition, a move that could actually eliminate jobs.

Such a scenario is what Sen. Dianne Feinstein (D-Calif.) and former senator John Breaux (D-La.) sought to avoid when they proposed an amendment to limit the uses of the repatriated sums to job-generation activities. But the amendment was defeated, and now the Treasury Department is working on further guidance.