A bill to bring home billions
A new law immediately lowers the tax on foreign earnings from 35 to 5.25 percent
Tam Harbert -- EDN, November 1, 2004
Congress giveth, and Congress taketh away. It did both to the technology industry this fall, taking away a popular export subsidy but also reducing taxes on corporate earnings for domestic manufacturers and creating a one-year tax holiday that will let companies bring hundreds of billions of dollars back into the country at a dramatically reduced tax rate.
There was so much to digest in the massive, 650-page bill, called the American Jobs Creation Act of 2004, that high-technology companies need time to determine exactly how it affects them, say industry spokespeople. The initial purpose of the legislation was to repeal a U.S. export subsidy, called the Foreign Sales Corporation-Extra Territorial Income (FSC-ETI) benefit, that had been ruled illegal by the World Trade Organization. Pressure had been building for the change since the European Union began charging retaliatory tariffs on certain U.S. goods last March. To compensate the companies that had been receiving the FSC-ETI benefit, including many high-tech companies, Congress cut the tax rate on manufacturers that engage in domestic production. Critics noted that Congress stretched the definition of domestic production to include activities, such as Starbucks' roasting of coffee beans, whose designation as manufacturing is questionable. But most high-tech businesses, including software companies such as Microsoft, are expected to receive the tax break, which drops the top rate from 35 to 32 percent. The reduction is expected to save some 200,000 companies $76.5 billion over 10 years.
The most important part of the bill for the technology industry is a provision that lowers taxes for one year from 35 percent to 5.25 percent on profits repatriated from abroad. That provision was included as a short-term economic stimulus to encourage companies to bring home anywhere from $450 billion to $650 billion they have earned overseas. Companies already pay foreign taxes on that income, so they have been reluctant to bring it back to the United States and pay the additional U.S. corporate tax of 35 percent. "It was effectively double taxation," says Storme Street, senior manager of government relations at the Electronic Industries Alliance.
The law requires companies to have a "domestic reinvestment plan," approved by the CEO and board of directors, for how to spend the money.
The bill will likely prompt the tech industry to bring hundreds of billions of dollars back to the United States. Although Intel would not yet give an estimate of how much it could repatriate, "it is a limited window of opportunity that we intend to take advantage of," says Jennifer Greeson, a company spokesperson. Hewlett-Packard has about $14.5 billion in overseas profits that are eligible for repatriation under the statute, according to Dan Kostenbauder, vice president of transaction taxes at HP. The law limits the amount to either $500 million or the amount of earnings a company has "permanently reinvested outside the United States," whichever is greater. The amount "permanently reinvested" is determined by whatever figures the company has reported as such in its financial statements dated before June 30, 2003. Companies are allowed to use an average figure based on amounts reported in three of the five most recent tax years ending before that date.
The law requires companies to have a "domestic reinvestment plan," approved by the CEO and board of directors, for how to spend the money. That plan may include worker hiring and training, infrastructure improvements, R&D, capital investments, or "the financial stabilization of the corporation for the purposes of job retention or creation." The law specifically prohibits using the funds for executive compensation. Although no government agency will be monitoring these corporate plans, they would be examined if the IRS were to audit company, says Mark Nebergall, president of the Software Finance and Tax Executives Council, a trade association. "Anyone in their right mind is going to make that plan as broad as possible" to cover all potential uses for the money, he notes.
The legislation was to take effect as soon as the president signed the bill. Companies can choose to repatriate the earnings either in the tax year in which the legislation was approved or in the year thereafter, says Kostenbauder. Most companies will probably take some time to consider how best to use the money. But if a company has been anticipating passage of the law and has a pressing need, "it may be prepared to act as soon as the president signs it," he says. Sources expect the president to sign the legislation before the election.
