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.
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