Red: About the $ big-pharma re-patriation:
NEWS, NEWS , Treasury and IRS Issue Guidance on Repatriation of Dividends Under Code Sec. 965 (TDNR JS-2195; Notice 2005-10; Treasury Department Fact Sheet) (January 2005)
Treasury and IRS Issue Guidance on Repatriation of Dividends Under Code Sec. 965 (TDNR JS-2195; Notice 2005-10; Treasury Department Fact Sheet) (January 2005)
The Treasury and IRS have issued the first in a series of guidance releases on the temporary dividends-received deduction under Code Sec. 965 (repatriation of dividends provision). The provision, which was added by the American Jobs Creation Act of 2004 (P.L. 108-357 ), generally provides that the U.S. corporate shareholder of a controlled foreign corporation (CFC) may elect for one tax year, an 85-percent dividends-received deduction for the cash distributions it receives from the CFC. For the deduction to apply, the dividend must, among other requirements, be invested in the United States pursuant to a domestic reinvestment plan. The guidance focuses on the definition of a cash dividends, domestic reinvestment plans, permitted and nonpermitted investments in the United States and reporting and administrative requirements. Future guidance will cover the foreign tax credit and expense allocation, rules for adjusting the calculation of base period amounts taken into account in mergers, acquisitions and spin-offs and rules regarding controlled groups. The guidance is effective for tax years for which taxpayers have elected Code Sec. 965 and any relevant subsequent tax year.
Cash Dividends
The guidance provides details for determining whether a cash dividend has been paid. The term"cash dividend" includes cash amounts treated as dividends pursuant to Code Sec. 965(a)(2) (receipt of boot treated as a dividend). It also includes cash in both U.S. and foreign currency. The fact that a CFC held cash equivalents, within the meaning of Reg. §1.897-7T(a) before the payment of a cash dividend, and the U.S. shareholder holds cash equivalents after the payment of the dividend, will not cause the IRS to recharacterize the dividend as the distribution by a CFC of cash equivalents (rather than a required distribution of cash).
Cash dividends may be paid by a CFC to a pass-through entity, such as a partnership or disregarded entity owned by the U.S. shareholder if the shareholder receives cash in the amount of the CFC dividend during the tax year for which the election is in effect.
The guidance provides rules to coordinate Code Sec. 965 with Code Sec. 959 , previously taxed income rules. Distributions out of earnings and profits described in Code Sec. 959(c)(1) and Code Sec. 959(c)(2) (distributions attributable to earnings and profits included in income under Code Sec. 951 ) do not qualify as dividends.
Domestic Reinvestment Plan
The requirements for a dividend reinvestment plan were generally vague as enacted by the 2004 Jobs Act. The new release provides the much-needed guidance for establishing a plan. In general, a domestic reinvestment plan must be in writing and must describe how the dividend is to be reinvested in the United States with reasonable detail and specificity. The plan may cover more than one cash dividend from one or more CFCs. A taxpayer may also adopt separate plans for different cash dividends subject to the election.
The guidance clarifies provisions dealing with the approval of the dividend reinvestment plan. Code Sec. 965(b)(4)(A) requires that the plan be approved by the president or similar official before the dividend is paid and that there be subsequent approval by the board of directors or other body with similar authority. The guidance provides that the subsequent approval can take place after the dividend is paid and no special meeting is required.
The domestic reinvestment plan must describe specific anticipated investments in the United States. The IRS and Treasury do not intend to issue a template or form for the plan. The composition of a plan may vary according to the type of investments anticipated. Relevant facts and circumstances, such as the type of investment, the time period for the investments and factors that might affect the ability to make the investments, are relevant facts and circumstances that can be taken into account in applying the reasonable specificity standard. The plan must provide the detail necessary to demonstrate upon examination that the expenditures subsequently incurred were contemplated at the time the plan was adopted. The plan may provide for alternative investments to cover situations where the principal investments are delayed or rejected. Subject to a special transition rules for dividends paid before January 13, 2005, a taxpayer may not modify or amend the plan after the dividend is paid.
Taxpayers will not be required to trace or segregate the specific dividend proceeds received to demonstrate proper investment, and, as long as a sufficient amount of funds is properly invested pursuant to the plan, nonpermitted investments will not generally affect the eligibility of the dividend. A plan may be subject to greater scrutiny if it provides for investment over a number of years during which the taxpayer is making nonpermitted investments. Expenditures made in the tax year of the election are considered to be made pursuant to the domestic reinvestment plan, no matter when they are made during the year. Thus, expenditures for permitted investments made during the plan year, but prior to the cash dividend, may qualify as permitted investments. If a U.S. shareholder expends less than the full amount of the dividend on permitted investments, the dividend satisfies the requirements only to the extent of the amount expended.
Permitted, Nonpermitted Investments
A nonexclusive list of permitted investments is described in the guidance. Generally, payments must be made to unrelated persons and must be in cash. Details are provided on the following permitted investments:
(1) funding of worker hiring, training and other compensation (generally, expenditures for hiring new workers and training new and existing workers, compensation and benefits);
(2) infrastructure and capital investments (physical installations and facilities that support the business and other assets integral to the conduct of the business, provided the infrastructure and investment is in the United States);
(3) research and development (generally, expenditures that qualify under Reg. §1.174-2 for research and development conducted in the United States);
(4) financial stabilization of the corporation for purposes of job retention or creation (including repayment of taxpayer debt, satisfaction of an obligation to fund a qualified plan and other expenditures that contribute to this purpose under the facts and circumstances);
(5) acquisition of interests in business entities (such as a corporation or partnership and regardless of whether the entity is foreign or domestic, if the taxpayer owns directly or indirectly at least 10 percent of the value of the business entity after the acquisition);
(6) advertising and marketing expenditures (expenditures with respect to trademarks, trade names, brand names or similar intangible property if the activities are performed in the United States); and
(7) intangible property (purchased or licensed if the rights to the property are used in the United States).
The financial stabilization category requires the company to reasonably believe that stabilization will help the company retain or create jobs. It includes the repayment of debt, whether or not the lender is a U.S. person, and the funding of a pension plan. Payments for liabilities, including legal settlements, could be permissible under this category. The corporation cannot repay debt and then replace the debt with a loan on substantially the same terms. A buy-down of the corporation's stock is not a permitted investment. The Treasury officials said they gave this issue a hard look, before deciding the use was not permitted.
A nonexclusive list of investments that are not permitted are described in the guidance. Details are provided on the following nonpermitted investments:
(1) executive compensation;
(2) intercompany distributions, obligations and transactions;
(3) dividends and other distributions with respect to stock;
(4) stock redemptions;
(5) portfolio investments in business entities;
(6) acquisition of debt instruments or other evidences of debt; and
(7) tax payments.
Reporting/Administrative Requirements
The election to apply Code Sec. 965 is made by filing Form 8895, with a timely filed return, including extensions, for the tax year. Prior to the issuance of Form 8895, a taxpayer must attach a statement to the return to make the election. A taxpayer must also attach an information statement to the tax return for the tax year of the election and for every subsequent year that the investments required under the plan are not made by the beginning of the year. Although a facts and circumstances test is used to determine whether a dividend has been properly invested, a safe harbor method is provided under which a taxpayer will be considered to have established proper investment if progress toward completion of the planned U.S. investments is shown. Transition rules are provided for dividends paid and tax returns filed prior to January 13, 2005.
Fact Sheet
A fact sheet issued by the Department of Treasury highlights, in question-and-answer format, certain points about Code Sec. 965 and the guidance issued. Specifically, Code Sec. 965 can apply to either 2004 or 2004 calendar-year taxpayers, depending on whether the taxpayer elects to apply the provision to the last tax year that begins before October 22, 2004, or the first tax year that begins during the one-year period beginning on October 22, 2004. Additionally, a corporation subject to a 35-percent corporate tax rate on the 15-percent amount of the dividend not repatriated would be subject to an effective tax rate of 5.25 percent. The tax break can be used only for the year specified; it cannot be used in later years. Companies do not have to trace or segregate repatriated funds and there is no time limit for investment. Tort liabilities, as permitted investments, are not specifically addressed in the guidance. Expenditures for financial stablilization for domestic job retention or creation is a permitted use and would cover a payment to satisfy a company's outstanding liabilities.
IRS Chief Counsel Donald Korb said at a press conference that the new guidance will give corporations the time they need to establish their reinvestment plan by the end of 2005. At the same time, he indicated, the guidance will give IRS examiners"the necessary roadmap to ensure compliance with the new rules."
The repatriation rules were issued less than three months after the 2004 Jobs Act took effect and are the third major project required by the Act. In the past two months, the Treasury and the IRS have issued guidance on the 2004 Jobs Act's tax shelter and deferred compensation provisions. Guidance on the Act's new manufacturing deduction should come out"very soon," Korb indicated.
"Given the importance of the new repatriation provision to U.S. companies, coupled with the immediate effective date of the provision and its temporary nature, issuance of prompt guidance was a major priority," said Eric Solomon, Treasury Acting Deputy Assistant Secretary for Tax Policy.
The Treasury and the IRS will issue subsequent guidance on other important aspects of Code Sec. 965 , including the calculation of the base period dividend amounts, the foreign tax credit and allocation of expenses, and acquisitions, spin-offs and controlled groups. Work has begun on next piece of guidance but Solomon said that it is too early to know when the guidance will be issued.
Treasury Department News Release, TDNR JS-2195
Notice 2005-10
Treasury Department Fact Sheet
Other References:
Code Sec. 965
