Taxation: Rush To Remit?

Nov. 22, 2005
A potentially beneficial tax provision expires soon. Manufacturers need to determine now whether pursuing it makes financial sense.

Manufacturers have about six weeks left during which they can bring back to the United States at favorable tax rates some of the money they have made abroad. That said, the terms under which the transfer can take place are so exacting that companies could be excused for not even trying. For example, the rules require that funds equivalent to the amount of the repatriated cash be invested in the U.S. according to a specific plan written by management and approved by the CEO or other company executive. Indeed, manufacturing-firm finance executives, tax practioners and other participants in a July 2005 New York roundtable characterized the process "as complex, in many cases, as a merger or acquisition."

Nevertheless, any company whose foreign subsidiaries have significant earnings should consider what is technically known as a Section 965 repatriation, states T. Timothy Tuerff, a partner in the Washington, D.C., national tax office of Deloitte Tax LLP. Enacted as part of the 2004 American Jobs Creation Act, Section 965 of the U.S. Internal Revenue Code effectively reduces the tax rate on certain U.S.-destined dividends to 5.25% from the nominal corporate tax rate of 35%. Ultimately, "whether or not it is a prudent financial decision will depend on the facts and circumstances of each individual company," stresses Tuerff. And use of Section 965 "is not limited to a specific industry," he emphasizes. A manufacturer making machines in Ireland, a company creating software somewhere else offshore or a firm producing pharmaceuticals outside the U.S. could all be candidates for reduced-rate dividend repatriation.

Where do companies begin? Ask and answer a question, indicates Tuerff. The question is: Where do I want my capital? For example, do I want to leave it overseas, perhaps to help fund additional plant and equipment as part of an expansion of operations? Or do I want the capital in the U.S., perhaps to help reduce the parent company's debt?

The participants in the July roundtable agreed asking such questions is important. "Companies should undertake repatriation in pursuit of a broader corporate strategy, not as a limited, tactical move to gain more favorable tax treatment," states a CFO Research Services report on the meeting. "This [has] meant, for most companies, that planning for repatriation involved assessing a company's need for cash both at home and abroad to fund organic growth plans, pay down debt, or make acquisitions."

The best estimate is that a few hundred companies, mostly large multinationals, have asked the critical questions and done the repatriation -- although, says Tuerff, "a number of the medium-size companies, as they get to the end of the year, are looking at [the] provisions."

Time is clearly of the essence. The end of Section 965 is nigh, although you're unlikely to see a bearded man dressed in a robe and sandals holding aloft a sign bearing that message. Could it come back sometime in the future? It's possible, but don't count on it, says Deloitte's Tuerff.

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