Repatriation.......
Shark Attack? I wasn't attacking anyone and I don't think anyone else was either. I'm a CPA and a Level III Candidate in the CFA Program. I have spent the majority of my career working on tax consulting, audit and financial restatement projects for MNC's.
I want to congrat you on being a successful stockbroker with two major Wall Street I-Banks and all of that stuff. I don't know why it matters how much money you have sitting in unrealized capital gains, however, you are a stockbroker so I shouldn't be too surprised by that comment.
With respect to the topic at hand repatriation of earnings, here's a little overview of the HIA related to repatriation of earnings......
The foreign repatriation incentive provision of the American Jobs Creation Act, IRC §965 (a.k.a. the Homeland Investment Act or "HIA"), was enacted to encourage U.S. based multinational corporations ("MNCs") to repatriate certain foreign earnings for the purpose of stimulating investments and job creation in the U.S. The provision temporarily reduces U.S. federal income tax assessed on certain offshore earnings by allowing MNCs an 85% dividends received deduction for certain "qualified dividends." Consequently, MNCs who elect to apply this provision would be subject to a 5.25% U.S. income tax rate on "qualified dividends" repatriated back to the U.S., rather than the regular statutory 35% rate.
MNCs wanting to benefit from §965 face various challenges. Various requirements of the provision are unclear, and currently lack relevant guidance. In fact, currently there is ambiguity even around the definition of a "qualified dividend". Failure to meet any one of the requirements will cause the dividend to be taxed at the full 35% rate. Because many MNCs are expecting to repatriate billions of dollars in cash under this provision, the cost of failing any one of the requirements may be huge for a company.
Second, the calculation of "extraordinary dividends" and "base period amounts" may require significant quantitative analysis. In fact, foreign subsidiaries from which extraordinary and base dividends will be paid may require earnings and profits (e&p) and tax pool calculations. Consequently, MNCs who expect to be repatriating from many or tiered subsidiaries may require numerous e&p and tax pool calculations, in addition to the calculations needed under §965.
Third, implementation of the §965 strategy may be complex as there are many steps involving various corporate departments, beyond Tax. For example, the CEO and the Board will need to approve the reinvestment plan, Treasury will need to fund the dividend, the CFO will need to assess the financial statement disclosures, and the legal department will need to work with the foreign offices to resolve any foreign legal restrictions on the cash.
Fourth, insufficient planning could add nondeductible tax costs to the repatriation. In addition to the disallowance of 85% of the foreign tax credits (FTCs) associated with
the repatriated dividend, § 965 also disallows 85% of any withholding taxes that would otherwise be creditable as FTCs. Consequently, MNCs may wish to restructure some of their global operations to limit their withholding tax liabilities. Similarly, there may be some detrimental state tax impact if the states do not adopt the provision in the same manner and timing as the federal statute.
New §965 is intended to attract money away from offshore jurisdictions and encourage U.S. based multinationals to repatriate surplus foreign profits, ultimately helping to stimulate business investment in the United States. This provision temporarily reduces the U.S. federal income tax assessed on offshore earnings, for a one-year period, by allowing U.S. based multinational corporations an 85% dividends received deduction for certain "qualified dividends" repatriated from controlled foreign corporations (CFCs) in excess of the "base amount." The "base amount" would be determined by a combined average of all distributions from all CFCs to the U.S. taxpayer over the previous five years ending on or before June 30, 2003 excluding the high and low years.
"Qualified dividends" under §965 are expressly limited to cash dividends. Deemed dividends described in IRC sections 956, 1248, and generally in section 951, among others, generally, will not qualify for HIA benefits. However, certain CFC-to-CFC dividends that constitute subpart F income may qualify for the HIA benefit. The qualified dividend must meet a variety of other tests.
(1) The qualified dividend is limited to the greater of (a) $500 million or (b) the earnings reported on the company’s financial statement certified on or before June 30, 2003, as permanently reinvested outside the United States, or, in the case of a financial statement that fails to show such an earnings amount and which shows a specific amount of U.S. tax liability attributable to such earnings, the amount of such tax liability divided by 35%;
(2) The amount of the dividends must be invested in the United States under a domestic reinvestment plan approved by company management; and
(3) As mentioned above, the dividends must exceed the average repatriation level from all CFCs over a five-year base period. The base period is the five most recent tax years of the U.S. company ending on or before June 30, 2003. The two tax years in this five-year period with the highest and lowest repatriation amounts are disregarded in computing the base period average.
