Opportunity for bringing overseas profits home: the American Jobs Creation Act of 2004 has bestowed an unprecedented temporary tax break on Corporate America. To use it--or lose it--is the quandary many are finding themselves in. Here is some advice for making the best decision for your company.

• Author: Stoffregen, Philip A.
• Position: Tax

A one-year tax incentive--part of the American Jobs Creation Act of 2004--is encouraging U.S. companies to bring back hundreds of billions of dollars from their overseas subsidiaries. Although temporary and elective, this provision--section 965 of the Internal Revenue Code--is creating waves in the U.S. business community.

While the Act was signed into law by President Bush on Oct. 22, 2004, Congress has emphasized that, "there is no intent to make this [economic stimulus] measure permanent, or to 'extend' or enact it again in the future." Accordingly, U.S. companies must act quickly to determine whether they wish to take advantage of this incentive.

Section 965 of the Act allows a U.S. company (or a U.S. consolidated group) to elect for one taxable year to repatriate earnings from foreign subsidiaries at a reduced tax rate. It applies to a company's first tax year beginning on or after Oct. 22, 2004 (2005 for calendar-year taxpayers), or the preceding tax year (2004 for calendar-year taxpayers).

A U.S. company is permitted to deduct 85 percent of qualifying dividends, which equates to an effective tax rate of 5.25 percent. This deduction is only available, however, to the extent that the company properly invests the funds in the U.S. And, unfortunately, the law itself leaves open as many questions as it answers.

In an effort to fill in the blanks, the Internal Revenue Service (IRS) released the first in what is expected to be a series of notices in January. This notice provides guidance by specifying parameters for a company's domestic reinvestment plan and clarifying what constitutes a permitted U.S. investment. Overall, the IRS approach is quite flexible, allowing taxpayers considerable leeway in qualifying under this provision.

What Should U.S. Companies Do?

A U.S. company interested in taking advantage of this unprecedented opportunity should first assess how much of its foreign subsidiaries' earnings would be eligible for the reduced tax rate if they were repatriated. Generally, only cash dividends from foreign subsidiaries controlled by the U.S. company (or U.S. group) count.

Several limitations may apply to reduce the amount of eligible dividends. For example, only extraordinary dividends (dividends in excess of average repatriations in recent years) are eligible. Moreover, the amount of eligible dividends may not exceed $500 million, or the amount of earnings designated as indefinitely reinvested outside the U.S. under financial...