Few Firms Expected To Take Up AJCA Tax Break

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

01 February 2005

Few US companies outside of the pharmaceutical and technology sectors are expected to take advantage of the one year tax break passed under the American Jobs Creation Act, due to restrictions on how the repatriated money can be spent, according to some experts.

Under Internal Revenue Code Section 965, which was enacted as part of the AJCA in October 2004, US companies may elect, for one taxable year, to receive an 85% deduction for eligible dividends coming from their foreign subsidiaries.

However, the provision also contains several limitations on the repatriated dividends that are eligible for the reduced tax rate. One key requirement is that the repatriated funds must be invested by the company in the United States pursuant to a domestic reinvestment plan approved by company management before the funds are repatriated.

Consequently, some observers believe that the companies most likely to take advantage of the temporary 5.25% income tax rate will be those with substantial research and development budgets.

"I don't think there will be a mass movement of money, and I don't think it will have a very big impact on shareholders," Austan Goolsbee, an economics professor at the University of Chicago's Graduate School of Business, told Reuters.

The firms which have expressed an early interest in repatriating funds are mainly to be found in the pharmaceutical sector and include Johnson & Johnson, which plans to bring back $11 billion in foreign earnings, Eli Lilly ($8 billion), Bristol-Myers Squibb ($9 billion) and Scherring Plough ($9.4 billion).

It has also emerged that Microsoft is considering repatriating $780 million under the tax break this year.

However, these amounts are relatively small in relation to the estimated $500 billion in earnings held by America’s top 500 firms in foreign accounts and other assets out of reach of the IRS.

Recommended