A study by Grant Thornton found that only 843 U.S. corporations out of nearly 10,000 took advantage of a one-time dividend deduction that rewarded them for repatriating their foreign profits, giving them deductions totaling $265 billion.
As part of the American Jobs Creation Act of 2004, Congress tried to encourage U.S. corporations to repatriate foreign earnings by allowing them to deduct 85 percent of the qualifying dividends received from the foreign corporations they controlled. Foreign earnings are generally not taxed until they are repatriated, but can be taxed as high as the top corporate rate of 35 percent when paid as dividends to U.S. corporations.
The one-time deduction was subject to several restrictions and limitations, and required that the extraordinary dividends from the controlled foreign corporations qualifying for the deduction be reinvested in domestic activities. Almost 10,000 U.S. corporations had CFCs in 2004, but just 843 took advantage of the deduction.
Those corporations repatriated a total of $312 billion in qualified dividends, giving them a combined deduction of $265 billion – almost one-third of the total accumulated non-taxable earnings of all CFCs for tax year 2004.
Corporations with earnings in high-tax jurisdictions are often able to use foreign tax credits to reduce U.S. taxes on repatriated income, but companies with CFCs in low-tax jurisdictions have less incentive to bring profits home. Over 60 percent of the dividends qualifying for the one-time deduction were repatriated from Europe, with 26 percent coming from CFCs incorporated in the Netherlands. Almost 10 percent came from Bermuda CFCs and 5.5 percent came from Cayman Islands CFCs.
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