Like other multinationals, Dell Inc. has amassed an impressive pile of overseas cash: $4.1 billion, to be exact. That hasn’t been returned to shareholders or reinvested. Instead, it sits in accounts in Europe and Asia, “permanently” reinvested to avoid the 35 percent tax the company would normally pay if it decided to repatriate that money.

Now Dell is preparing to send those earnings home because of the provision in last year’s American Jobs Creation Act that temporarily drops the tax rate for repatriated earnings from 35 percent to 5.25 percent. Moving the money won’t be easy. The company 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.

The computer maker also needs to comply with a list of restrictions that bars companies from spending the cash on such items as dividends, share buybacks, or executive compensation (see “Forbidden or Not?” at the end of this article). “This isn’t rocket science,” says Dell’s group treasurer, Brian MacDonald, “but it does require a lot of plumbing.”

Some companies seem to have decided that the tax cut is more trouble than it’s worth. Xerox, for example, says it doesn’t see “material benefit” from the incentive, and is unlikely to repatriate any of its own foreign earnings. For others, the investment opportunities abroad may simply outweigh the tax savings at home. General Electric has $14 billion in eligible foreign earnings but will bring little of it home, preferring instead to invest that money in fast-growing emerging markets.

Overall, this provision of the Jobs Creation Act isn’t likely to create all that many jobs. One reason is that the earnings returning to the United States will probably be far less than the law’s boosters predicted. Chris Senyek, an accounting analyst with Bear, Stearns & Co., predicts that out of $421 billion in eligible earnings, only $175 billion will actually be repatriated. (Previous studies had put the number closer to the full amount.)

The other, more important, reason is that the restrictions Congress imposed on how companies can use their savings are looser than they appear. Indeed, many analysts predict that much of the money will go to the very things that aren’t allowed under the rules, including dividends and stock buybacks.

How to Spend It

As it happens, the act does explicitly allow some investments with little, if any, direct link to new jobs. For example, mergers and acquisitions, advertising, and debt repayment are all permitted. Paying back creditors should be especially popular. Louise Purtle, chief strategist for London-based research firm CreditSights, argues that while today most large companies have strong balance sheets, it may be a good time to reduce leverage. “We are probably just past the peak of the credit cycle,” she says. “And with interest rates going up, now would be a good time to start paying debt if you can.”

Furthermore, the requirements won’t do much to prevent companies from spending their money on prohibited investments. The reason is that while boards must approve detailed reinvestment plans, the law doesn’t require companies to spend any more on approved investments than they would normally. So, for example, a pharmaceutical company that typically spends $5 billion a year on R&D can declare that $5 billion of its repatriated earnings will go toward R&D, thus freeing the $5 billion already allocated for other uses. “On the surface, it looks like you can’t use the repatriated money for share repurchases, dividends, or executive compensation,” says Senyek. “But the reality is that you can. Ultimately, I think that’s what it will be used for.”

Indeed, Congress seems to have overlooked the fact that many companies are already flush with cash and could easily raise capital for domestic investments if they wanted to. From a board’s perspective, a better use of repatriated earnings might be direct return to shareholders.

Don’t expect large one-time dividends, however. The Internal Revenue Service will be alert to obvious attempts to skirt the rules. Instead, analysts expect gradual increases in dividends and other nonpermitted uses of the money. Predictably, companies are cautious in their comments. Brian Byala, assistant treasurer at Pfizer Inc., commented at a recent conference that while it’s possible to get around the rules, a company runs the risk of an IRS investigation. “That’s certainly not a road we’re going down,” he said.

Heavy Lifting

Beyond the government scrutiny, such as it is, the repatriation provision poses other challenges. One is the difficulty of pulling earnings out of local subsidiaries. Treasurers need to unwind intercompany lending arrangements and deal with any local rules restricting the movement of cash outside of a country. In certain places, including China and Germany, these rules might even block the repatriation. “In some countries, regulations absolutely stop the conversation,” comments one banker. “In China, for example, repatriation is a nonstarter.”

Dell has been working on this since the middle of 2004, well before the law was passed. “It’s taken a lot of time to roll our money out of legal entities around the world,” says MacDonald. “Each country has different rules about equity and capital reserves.

“You also need to spend a lot of time preparing the statutory books and getting resolutions from the boards of your subsidiaries to distribute the money,” he says. And while the law doesn’t require companies to set up separate legal entities just to track the earnings, many are taking care to trace the money anyway. “You want good recordkeeping so that when the IRS comes in, you can review everything with them,” says MacDonald.

There is also the task of turning the earnings into cash. Often foreign earnings are tied up in securities portfolios or in physical assets, such as buildings and equipment. “Liquidating your portfolio may take a lot of heavy lifting,” says the banker.

Fortunately, the law doesn’t require companies to sell their factories. Instead, it allows foreign subsidiaries to borrow money for repatriation. But that can raise credit issues. In May, Moody’s issued a paper warning companies that it will be watching how they repatriate their money and what happens to it once it’s in the United States. In particular, Moody’s warns of “structural subordination” — cases in which a subsidiary borrows money and the terms of the loan give the lender a claim on the unit’s cash flows that is superior to that of the parent company. This could keep the parent company from tapping the subsidiary’s cash to meet other obligations.

Finally, there are foreign tax credits (FTCs) to worry about. Ordinarily, the U.S. tax code allows companies to take a full credit for any foreign taxes they have paid. But under the American Jobs Creation Act, FTCs shrink along with the tax rate. Consider the example of a company with $100,000 in foreign earnings. If the company had already paid $20,000 in foreign taxes on those earnings, it would ordinarily be entitled to reduce its $35,000 U.S. tax bill by that full amount. But under the new law, the U.S. tax bill falls 85 percent, to only $5,250, and the tax credit falls by the same percentage to just $3,000, leaving the company with a final bill of $2,250.

Since the tax credits are worth much less this year, says Mark Weinstein of Hogan & Hartson LLP in New York, the company would do better to bring earnings home from a low-tax country like Ireland or Switzerland (where the FTCs would be small) than from a high-tax jurisdiction like France. That way, a company can save its more-valuable FTCs for the day when the U.S. tax rate returns to 35 percent. That’s currently slated to happen for fiscal years beginning on or after October 22, 2005. “It requires careful planning, but if you can find low-taxed foreign earnings to repatriate — and can identify the source of the repatriation — you’ve done yourself a favor,” says Weinstein.

Still, companies have only until the end of this fiscal year to make their plans. Not many anticipated the law, and when it passed many delayed their work until the Treasury Department clarified the rules. “It surprised many companies — most didn’t think it would ever be passed,” says Senyek. “But even so, it has turned out to be a nice gift to corporations.”

Don Durfee is research editor of CFO.

Forbidden or Not?

If Washington had really wanted to encourage companies to use repatriated earnings to create jobs, lawmakers could have required them to set up separate legal entities so expenditures could be tracked. Instead, Congress settled on a list of prohibitions that may have little real influence over how companies ultimately spend their money.

Quasi-Prohibited Investments

• Executive compensation
• Intercompany transactions
• Dividends and other shareholder distributions
• Stock redemptions
• Portfolio investments
• Debt instruments
• Tax payments