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> Information provided on this site is for general guidance only and is often simplified. Actual IRS procedures are complex, and taxpayers should obtain professional assistance or use IRS sources for complete information.


The American Jobs Creation Act Of 2004
The AJCA brought in general tax breaks to replace the banned FSC and ETI legislation.

The Results Of The AJCA
Eventually, more than USD300bn was repatriated under the Act, although it is not clear that it was deployed as the Act intended.

Resolution Of The EU's Complaint
The EU objected to 'grandfather' clauses in the AJCA; but the issue was resolved in 2006.


The AJCA In 2005

In January, 2005, it was expected that few US companies outside of the pharmaceutical and technology sectors would take advantage of the one year tax break passed under the American Jobs Creation Act, due to restrictions on how the repatriated money could be spent.

The provision contained several limitations on the repatriated dividends that are eligible for the reduced tax rate. One key requirement was that the repatriated funds should be invested by the company in the United States pursuant to a domestic reinvestment plan approved by company management before the funds are repatriated.

Consequently, some observers believed that the companies most likely to take advantage of the temporary 5.25% income tax rate would be those with substantial research and development budgets.

"I don't think there will be a mass movement of money, and I don't think it will have a very big impact on shareholders," Austan Goolsbee, an economics professor at the University of Chicago's Graduate School of Business, told Reuters.

The firms which expressed an early interest in repatriating funds were mainly to be found in the pharmaceutical sector and included Johnson & Johnson, which planned to bring back $11 billion in foreign earnings, Eli Lilly ($8 billion), Bristol-Myers Squibb ($9 billion) and Scherring Plough ($9.4 billion).

It also emerged that Microsoft was considering repatriating $780 million under the tax break.

However, these amounts were relatively small in relation to the estimated $500 billion in earnings held at the time by America’s top 500 firms in foreign accounts and other assets, out of reach of the IRS.

In the same month, the Treasury and IRS issued a notice (Notice 2005-10) that provided guidance to companies on the domestic reinvestment plan requirement under the new provision. The notice specified permitted investments in the United States for which the repatriated funds may be used under the provision.

The new notice (Notice 2005-38) provided additional guidance on the amount of dividends that qualified for the dividends received deduction.

In May, 2005, the Treasury Department and IRS announced the second in a series of notices that provided detailed guidance for US companies that elected to repatriate earnings from foreign subsidiaries subject to the temporary reduced tax rate available under the AJCA.

The notice provided guidance to companies on what constitutes a qualifying dividend, the impact of mergers and acquisitions and issues related to the section 78 gross-up.

In August, 2005, the Treasury Department and IRS released the third in its series of notices providing guidance to companies on various issues arising under section 965, including issues relating to the identification of dividends, foreign tax credit and minimum tax credit, expense allocation and apportionment, and currency translation. Contemporaneous with the issuance of this notice, the IRS released the final Form 8895 (One-Time Dividends Received Deduction for Certain Cash Dividends from Controlled Foreign Corporations) and its instructions.

By October, 2005, it was becoming clearer to some that although many US firms had taken advantage of the tax break contained in the American Jobs Creation Act, the goal of the incentive - to create more jobs in the United States - might not be being fulfilled.

The Wall Street Journal revealed that 91 large firms had announced that they would be repatriating some profits under the one-year scheme, bringing back an estimated $206 billion.

However, the business daily revealed that although the majority of the companies concerned had released only broad outlines of their plans for the extra cash, job creation did not appear to feature highly.

The report went on to add that: "Some companies are even bringing home piles of cash while continuing to downsize. Colgate Palmolive Co., of New York, said in July that it planned to repatriate $800 million, at a time when the company also is pursuing plans to shut a third of its factories and eliminate roughly 12% of its work force, or 4,450 people, over four years."

In October, the United States Treasury Department released new guidelines clarifying the scope of the tax break on manufacturing income passed as part of the AJCA, although somewhat controversially, software purchased online was omitted from the regulations.

The provision in question, worth $76.5 billion over a decade, created a 9% deduction for qualifying US firms for domestic manufacturing activities, effectively reducing their corporate tax rate to 32% from 35% through 2010. The new rules sought to build and expand upon initial guidance issued by the Treasury Department in January.

The deduction applied to goods manufactured, grown or extracted in the United States and includes architectural services, construction, engineering, film development, and utilities.

The rules also encompassed software development, although somewhat controversially, were initially set only to apply to software which can be physically purchased by consumers on a medium such as a disc, and not to software downloaded to a personal computer. However, Treasury spokesman Taylor Griffin stated that the department had asked firms for additional comments on the new rules, and is still "open to ideas for better ways to draw the line".

Defense contractors and other businesses engaged in contract work for the government were allowed to participate in the tax break under the new guidance, as were manufacturers of certain components of a product.

The rules also contained guidance on how home builders should treat the cost of land in determining the value of their tax break from home sales.

The regulations were effective for taxable years beginning after December 31, 2004.

In May 2006, the US Treasury Department performed a U-turn over software services by including them in final regulations governing the application of the AJCA manufacturing tax deduction.

The Treasury revealed that in response to more than eighty comment letters received regarding the proposed regulations, the final regulations provide many additional comprehensive rules, definitions, simplifying conventions, and examples to ease the administrative burden on taxpayers.

As many critics of the AJCA tax break observed, it was virtually impossible for the money to be tracked once it had been brought back to the United States, and there was little to stop companies from using the money for precisely the purposes that the legislation had outlawed. Indeed, it is thought that some companies used repatriated profits to fund acquisitions, which, ironically, often lead to jobs being lost.

"Those companies are all very tax savvy and they are doing what everybody else would do - they are bringing the money at a lower cost and using it to fund all sorts of things," an economic advisor for HVB America Inc and chief economist at the New York Stock Exchange told Reuters.

"Ultimately what generates jobs is macroeconomic growth and sound policies, and not a tax break," he added.

An attempt in 2009 to repeat the AJCA's one-year repatriation window was defeated in the Senate. While there was some support for reinstating the measure in Congress, the protectionist overtones of President Obama's economic policies suggested that the White House was not about to reward US multinationals for investing overseas. This is a view shared by Senators Carl Levin and Bryan Dorgan, two long-standing anti-offshore campaigners whose voice has strengthened along with the Democrat majority in both houses of Congress.

“There’s another phrase for repatriation – it’s called rewarding the outsourcing of jobs," commented Dorgan in a joint analysis of the proposal with Levin.

"If we allow US corporations to once again send the money they earn abroad back to the US at a discounted tax rate, it will only lead to more companies moving their profits offshore. The goal is to strengthen our economy with tax policies and investments that will create jobs here. That won’t happen with a tax policy that rewards the outsourcing of US jobs," he argued.

An analysis of Internal Revenue Service figures by Grant Thornton produced in 2008 suggested that the ACJA tax break had mixed success. The repatriated USD312bn in qualified dividends in 2005 generated an estimated USD18bn in revenue for the Treasury – far exceeding the USD2.8bn in revenues predicted by the Joint Committee on Taxation. However, of the 10,000 or so US corporations which had CFCs in 2004, only 843 chose to take advantage of the tax break. There is also little evidence to suggest that the tax break increased domestic levels of investment.

Still, the fact remained that more than $300bn is in the US which wouldn't have been there otherwise. This is probably a case where the perfect would have been an enemy of the good.

BACK TO TOP

The American Jobs Creation Act Of 2004
The AJCA brought in general tax breaks to replace the banned FSC and ETI legislation.

The Results Of The AJCA
Eventually, more than USD300bn was repatriated under the Act, although it is not clear that it was deployed as the Act intended.

Resolution Of The EU's Complaint
The EU objected to 'grandfather' clauses in the AJCA; but the issue was resolved in 2006.

 

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