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IRS Publishes Guidance On Repatriation Of Foreign Earnings

by Mike Godfrey, for LawAndTax-News.com, Washington

17 January 2005

The US Treasury Department and the Internal Revenue Service last week published the first in a series of notices that will provide guidance for US companies planning to repatriate earnings from overseas subsidiaries subject to the temporary reduced tax rate available under the American Jobs Creation Act (AJCA).

Internal Revenue Code Section 965, which was enacted as part of the AJCA in October 2004, allows US companies to repatriate earnings from their foreign subsidiaries at a reduced tax rate. Section 965 provides that US companies may elect, for one taxable year, to receive an 85% deduction for eligible dividends coming from their foreign subsidiaries.

However, it 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.

The notice published last Thursday provides detailed guidance regarding the parameters for a domestic reinvestment plan and the kinds of investments in the United States for which repatriated funds may be used under this provision. It also provides guidance on the requirement that the repatriation be in the form of a cash dividend.

In addition, the notice provides guidance on the election process and on required information reporting regarding repatriated dividends and associated US investments, and provides a safe harbor mechanism for taxpayers to use in establishing that the domestic reinvestment plan requirement is satisfied.

"Given the importance of the new repatriation provision to US companies, coupled with the immediate effective date of the provision and its temporary nature, issuance of prompt guidance was a major priority," explained Eric Solomon, the Treasury Department's Acting Deputy Assistant Secretary for Tax Policy.

The full text of the IRS guidance on the repatriation of foreign earnings under the AJCA can be found in the Tax News Resources section.

 

 






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