Most US Firms Will Be Able To Repatriate Profits Under Tax Holiday, Say Analysts

by Mike Godfrey, Tax-News.com, Washington

20 January 2005

US companies will find it relatively easy to repatriate profits held overseas under the US government’s one year tax holiday on foreign earnings, despite the presence of some unforeseen restrictions in the recently-published Treasury guidance, according to analysts at investment bank Goldman Sachs.

The Treasury Department’s guidance setting out the conditions under which firms may repatriate earnings from overseas subsidiaries under the temporarily reduced tax rate of 5.25% (which was included in the American Jobs Creation Act), contained several limitations on the 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.

Despite these “unexpected restrictions” Goldman economists Alec Phillips and Ed McKelvey observed that the list of approved uses “is flexible enough that no companies should have difficulty in repatriating funds”.

"Many companies are eager to bring back cash, and most should have an easy time meeting the requirements," Phillips and McKelvey stated in a note to clients.

However, the Goldman analysts believe that the economic impact of the one-year tax break will nevertheless be somewhat limited.

"The wide range of permitted uses and the absence of any requirement for marginal increases in investment suggest that the impact on capital spending will be small," they forecast.

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