Doubts Linger Over Effectiveness Of AJCA Tax Break

by Leroy Baker, Tax-News.com, New York

04 November 2005

While many US companies have opted to take advantage of a one-year tax break for repatriated profits designed to spur domestic job creation, a recent survey by Reuters has revealed that the majority of firms are very reluctant to disclose how they are spending the cash.

Part of the American Jobs Creation ACT (AJCA) passed by Congress last year, the tax break allows companies to repatriate profits from overseas operations at a special 5.25% tax rate, compared to the normal rate of nearly 35%. The deadline for taking such action is December of this year, and Dow 30 companies have so far announced plans to repatriate about $133 billion.

The purpose of the tax break was to encourage firms to expand domestically and create new jobs in the process, and the legislation prohibited spending on executive compensation, dividends payments and share buybacks. However, recent reports have suggested that job creation does not appear to feature highly on the list of reasons why firms have repatriated foreign cash.

According to the Reuters survey of the 30 companies making up the Dow Jones Industrial Average, out of the 16 firms that have repatriated profits, only seven have provided even a broad outline of how they intend to use the money.

Only one firm, Intel Corp., was explicit with its plans, revealing that $6.3 billion in repatriated profits was being used to fund a $3 billion semiconductor plant in Arizona, and to expand two wafer fabrication operations in Colorado and Massachusetts.

As many critics of the tax break have observed, it is virtually impossible for the money to be tracked once it has been brought back to the United States, and there is little to stop companies from using the money for precisely the purposes that the legislation has outlawed. Indeed, it is thought that some companies have used repatriated profits to fund acquisitions, which, ironically, often lead to jobs being lost.

"Those companies are all very tax savvy and they are doing what everybody else would do - they are bringing the money at a lower cost and using it to fund all sorts of things," an economic advisor for HVB America Inc and chief economist at the New York Stock Exchange told Reuters.

"Ultimately what generates jobs is macroeconomic growth and sound policies, and not a tax break," he added.

Still, the fact remains that $133bn is in the US which wouldn't have been there otherwise. This is probably a case where the perfect would have been an enemy of the good.

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