Repatriated earnings under sec. 965: using the safe-harbor test in 2007 to ease compliance reporting and protect tax benefits.

• Author: Lucido, Peter D.

U.S. multinational corporations repatriated billions of dollars in earnings from foreign subsidiaries to the U.S. under Sec. 965 during the time such repatriation was allowed. Companies that took advantage of this unique opportunity benefited from the temporary 85% dividends-received deduction (DRD) applied to qualifying dividends. To protect these generous tax benefits, companies must comply with annual reporting requirements and abide by the statute's somewhat flexible reinvestment guidelines. During 2007, it is especially important for corporations to examine the status of their plans to ensure that at least 60% of those earnings have been reinvested in qualified projects by the end of the year. This item recaps the key features of Sec. 965, describes the related documentation and annual reporting requirements, and examines the advantages afforded companies that satisfy the safe-harbor test by the end of 2007.

U.S. Taxation of Non-U.S. Income and Sec. 965

The U.S. generally taxes the income of U.S. corporations from both domestic and foreign sources. However, income from foreign operations earned by non-U.S. subsidiaries is often subject to tax only when that income is distributed as a dividend to the U.S. parent company. It is estimated that, before the enactment of Sec. 965, multinationals had accumulated over $700 billion offshore in order to avoid U.S. taxes on their overseas earnings; see Gonzalez, "Q&A: Repatriating Foreign Earnings through the American Jobs Creation Act," July 2005, at http://corp.bankofamerica.com/ public/public.portal?_pd_page_label= products/abf/capeyes/archive_index& dcCapEyes=indCE&id=275.

Sec. 965 was signed into law as part of the American Jobs Creation Act of 2004. Its purpose was to encourage companies to repatriate those accumulated earnings in order to strengthen their domestic operations and stimulate the U.S. economy. For a period of one year, U.S. corporations could elect to receive an 85% DRD for eligible cash dividends repatriated from their non-U.S. subsidiaries. This election was available for the U.S. taxpayer's last tax year beginning before Oct. 22, 2004, or for the first tax year beginning during the one-year period beginning on Oct. 22, 2004. Thus, for calendar-year taxpayers, the election was made for either the 2004 or 2005 tax year. The lack of initial IRS guidance on certain technical issues, coupled with the time required by companies for extensive tax planning, resulted in many calendar-year corporations making the election for the 2005 tax year.

To qualify for this special DRD, electing corporations agreed to reinvest in the U.S. an amount equal to...