> Repatriation by US firms is primary driven by tax structure. I remember some bill proposed last year that would allow a tax break for US firms if they used the funds for payment of debt or investment (to create jobs). Did that bill pass? <
Foreign profits must meet rules to earn tax cut
usatoday.com
By Elliot Blair Smith, USA TODAY
The Treasury Department said Thursday that it won't give U.S. companies a tax break on about $420 billion in foreign profits if the money is used to pay for stock buybacks and dividends.
That advisory surprised Wall Street and could reduce the amount of foreign profit brought home under the one-year windfall, financial analysts said.
"This will have a dampening effect on the net inflow of funds," said Susquehanna Financial Group analyst Greg Kelly, who had predicted that as much as $320 billion in foreign profits would be repatriated this year.
Under the guidelines, U.S. companies will be eligible to repatriate foreign profits at the one-time tax rate of 5.25%, rather than the standard corporate rate of 35%, if they apply the funds to reducing debt or making acquisitions. That could help accelerate already-heightened merger activity, analysts said.
The technology and pharmaceutical industries have the biggest foreign cash stockpiles. Susquehanna's Kelly says technology firms are likely to use foreign profits to pay for acquisitions, including intellectual property. Intel recently said it had up to $6 billion eligible to be repatriated; Dell, $4 billion; and Oracle, $3.1 billion.
Kelly said pharmaceutical companies — with a $95.6 billion stockpile at the end of 2003, according to Morgan Stanley Research — are likely to use the foreign profits to pay down debt and litigation expenses.
Nevertheless, Treasury signaled the administration's intent that repatriated profits under the American Jobs Creation Act should benefit the economy as a whole, rather than individual shareholders.
Treasury indicated it would like to see the profits spent on domestic hires and training, capital spending, research and development, advertising and marketing, and to shore up underfunded pension plans.
The act became law in October, but companies have been slow to respond as they awaited clarification. Spokesmen declined to comment Thursday.
Companies that repatriate profit must do so under a detailed reinvestment plan, approved by management and the board. Investment information will have to be filed with the IRS, according to administration tax specialist Jeffrey Vinnik, who wrote the guidelines.
Warren Rojas, an investigative reporter for Tax Notes magazine, said, "Treasury's obviously providing plenty of flexibility. The only danger in that is this could invite more creative accounting."
In September, the non-partisan Tax Analysts published an analysis of IRS data showing that U.S. corporations were stockpiling foreign profits in offshore tax havens at a time when domestic profits were flat.
The Tax Analysts study found that the profits at foreign subsidiaries of U.S. companies had soared to $149 billion in 2002 from $88 billion in 1999. According to the report, among the largest beneficiaries were Bermuda, Ireland, Luxembourg and Singapore. |
