ACJA Tax Break Granted USD265bn In Deductions
Newly available data from the US Internal Revenue Service has revealed that a
one-time dividend deduction offered in a 2004 tax bill provided just 843 corporations
with deductions totaling USD265bn, according to an analysis by Grant Thornton.
Congress in the American Jobs Creation Act of 2004 tried to encourage US corporations
to repatriate foreign earnings by allowing them to deduct 85% of the qualifying
dividends received from 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% when paid as dividends to US corporations. The one-time deduction was subject to several restrictions and limitations,
and required that the extraordinary dividends from the controlled foreign corporations
(CFCs) qualifying for the deduction be reinvested in domestic activities. Almost
10,000 US corporations had CFCs in 2004, but just 843 took advantage of the
deduction, according to Grant Thornton. Those corporations repatriated a total of USD312bn in qualified dividends,
giving them a combined deduction of USD265bn – almost one-third of the
total accumulated non-taxable earnings of all CFCs for tax year 2004. “Even though just a small percentage of companies took advantage of the
one-time deduction, it was extremely successful in prompting the repatriation
of vast sums of foreign profits,” commented Joseph Calianno, international
tax technical practice leader for Grant Thornton. “It was a particularly
effective means for US corporations with CFCs in low tax jurisdictions to repatriate
earnings without a high US tax cost.” Corporations with earnings in high-tax jurisdictions are often able to use
foreign tax credits to reduce US taxes on repatriated income, but companies
with CFCs in low-tax jurisdictions have less incentive to bring profits home.
Over 60% of the dividends qualifying for the one-time deduction were repatriated
from Europe, with 26% coming from CFCs incorporated in the Netherlands. Almost
10% came from Bermuda CFCs and 5.5% came from Cayman Islands CFCs. The temporary provision’s success is likely to encourage Congress to
consider it again. The amount of money repatriated matched the most ambitious
estimates and dwarfed the expectations of Congress’s official scorekeeper,
the Joint Committee on Taxation. The JCT predicted the provision would bring in about USD2.8bn in new revenue
in 2005. Final revenue numbers aren’t available, but the USD312bn in qualified
dividends reported by the IRS should generate almost USD18bn in tax revenue
assuming a 35% corporate rate and an 85% deduction. The latest available IRS statistics show that manufacturing companies were
much more likely to take advantage of the provision. They were responsible for
over 80% of the dividends that qualified for the deduction. Pharmaceutical manufactures
alone accounted for over 30% of the qualifying dividends, with just 29 corporations
claiming an average deduction of almost USD3bn. .
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