3M to Repatriate $1.7 Billion

Company will record a one-time tax charge of about $75 million in the second quarter.
Stephen TaubJuly 1, 2005

3M said it plans to reinvest roughly $1.7 billion of foreign earnings in the United States under the American Jobs Creation Act of 2004, more than twice the $800 million the company had earlier announced.

As a result, the company will record a one-time tax charge of about $75 million in the second quarter, reducing 2005 second-quarter and full-year earnings by about $0.10 per share.

A provision in the 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 — hiring new workers, for example. In fact, economists at J.P. Morgan Chase & Co. predicted that the tax holiday could yield as many as 600,000 new jobs in the United States.

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Moving the money isn’t easy, points out CFO research editor Don Durfee. Dell Inc., which is planning to repatriate $4.1 billion, will need to position cash from long-term to short-term investments (only cash can be repatriated), roll up earnings out of foreign subsidiaries, and document where the money is coming from and where, exactly, it is going.

Under the act, companies cannot spend the cash on such items as dividends, share buybacks, or executive compensation. However, the Department of the Treasury has pointed out that companies are not required to trace or segregate the repatriated funds; they simply must demonstrate that an amount equal to the total of repatriated funds is invested under the domestic reinvestment plan.

Another option, as CFO observed, is being taken by General Electric. Although GE has $14 billion in eligible foreign earnings, it will bring little of money home — instead, the company will invest in fast-growing markets abroad.