With the dust finally settling on the American Jobs Creation Act of 2004, tax professionals are studying its voluminous sections and clauses to map out optimum strategies.
The legislation, signed by President Bush on Oct. 22, 2004, has already generated anxious hours of planning, analysis and calculations.
The reason behind the act - the elimination of the extraterritorial income regime of taxation that the World Trade Organization had ruled was an illegal subsidy - has resulted in a promise by the European Union to lift its sanctions on Jan. 1, 2005, when the bill takes effect.
However, EU commissioner for trade Pascal Lamy has some reserve ammunition if he wishes, according to Martin Tittle, an Ann Arbor, Mich.-based international tax attorney.
"Pascal responded in an interesting way," said Tittle. "He said he would lift the sanctions on Jan. 1, 2005, when the provisions of the bill take effect, but he will ask the WTO to review compliance, not of the general transition rules, but of the grandfathering rules."
"The grandfather rules allow contracts signed by last September to continue. The EU will ask for a review of that provision and see if it complies. It's like placing an order for ammunition they can use in the future, because it's almost certain that the WTO will say that the grandfather provision in Section 101(f) is illegal, and it's almost certain that we will not be willing to change," he said.
"The upshot," Tittle said, is that "the EU will get the authority for imposing sanctions on us, and won't need to do anything immediately. They'll have it sitting there as a bargaining chip if we get an issue on which we could impose sanctions on them."
"All the time the act was being considered, Lamy was vocal about the transition rules, but the grandfather clause was on the back burner," he went on. "It appears he moved it up to the front because of the Airbus-Boeing dispute [in which the U.S. accused the EU of subsidizing Airbus in an effort to overtake Boeing in aircraft sales], although he denies it."
Tittle believes it was a mistake to single out manufacturers for a special tax break, since it encourages everyone to try to be a manufacturer. "It would have been better to apply a tax break across the board, to businesses as a whole," he said. "The compressing of the foreign tax credit from nine baskets into two will encourage more cross-crediting. Where there's a high foreign tax in one jurisdiction and a low one in another, you get to combine income from both countries and can cross-credit against each other."
Bring that money home
The new tax law includes a one-year repatriation provision that grants an allowance of an 85 percent dividends-received deduction for distributions from controlled foreign corporations. To qualify for the deduction, the amount of the dividend must be invested in the United States.
"The theory is that this money otherwise would just stay overseas, rather than being brought back to the U.S.," said former IRS commissioner Charles Rossotti, who is now with the Washington-based Carlyle Group.
"If you look at the footnotes in 10-Ks, you'll see language about money overseas that would be taxed if it came back, just an indication that income has been earned in legal entities that would be subject to additional tax if it were repatriated. The belief is that people will use this provision to bring back cash and that will be invested domestically," he said.
The procedure inherent in using the provision can get complicated, according to Tittle. "You can't take a foreign tax credit on the income you repatriate, and you can pick and choose which dividends the provision applies to and which it doesn't. In order to maximize the benefit of the provision, a company with foreign subsidiaries in multiple jurisdictions will have to do some very involved calculations."
"There have been quite a few proposals of this type in the last year and a half," noted Dan McMann, CPA, an international tax partner with BDO Seidman. "Particularly in the manufacturing sector, there are companies with net operating losses that have been waiting for this one-time repatriation."
However, he noted, "a lot of clarification is still necessary with regard to Section 965. Given the limited time frame, there will probably have to be a technical corrections act, as well as regulations, to sort out some of the issues."
The short time frame and the complexity involved in figuring out which funds to repatriate make it difficult and expensive for companies to take full advantage of the opportunity, according to Gwen Spertel, chief executive of Sunnyvale, Calif.-based Liquid Engines, a maker of tax management and planning software.
"We have been working for the last two years on building an application for international tax planning," she said. "It can perform multi-year analysis forward and backward, and it's Sarbanes-Oxley-compliant in that it provides complete documentation of what options were considered and what action was taken."
"How to maximize your repatriation is the goal," said Jim Fuller, a partner and international tax attorney with Mountain View, Calif.-based Fenwick & West LLP. "In some cases, it may be easy to figure, but in many other cases it will be quite complicated."
For companies considering repatriation under Code Section 965, maximizing the U.S. deduction is not the only factor to consider, according to Selva Ozelli, CPA, international tax editor for New York-based RIA, a Thomson business. "In addition to Code Section 965 requirements, tax practitioners should also consider any applicable foreign transfer pricing or foreign earnings shifting rules that may apply to the dividends being repatriated to the U.S.," she said.
For example, she noted, there could be foreign rules that would apply to a movement of funds from a foreign country into the United States: "Foreign transfer pricing rules, foreign tax withholding rules, foreign tax corporate governance rules and foreign currency rules all might play a part in the decision to repatriate."
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