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This December 21, 2004, letter to the Treasury Department discusses AICPA's suggested areas of guidance needed to clarify the new repatriation deduction enacted in the American Jobs Creation Act of 2004. It covers questions specific to reinvestment plans (section 965(b)(4)), questions related to other aspects of section 965, and questions addressed in proposed technical corrections.
December 21, 2004
Mr. Eric Solomon
Deputy Assistant Secretary—Regulatory Affairs
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Room 3104 MT
Washington, D.C. 20220
Fax: (202) 622-1051
Ms. Barbara M. Angus
International Tax Counsel
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Room 3054 MT
Washington, D.C. 20220
Fax: (202) 622-0646
Re: Repatriation Guidance on the American Jobs Creation Act of 2004
Dear Mr. Solomon and Ms. Angus:
The American Institute of Certified Public Accountants (AICPA) is pleased to offer the following practitioner and taxpayer questions regarding the new repatriation provision of the American Jobs Creation Act of 2004 (AJCA). Given the short-lived nature of the election, guidance is urgently needed to enable taxpayers to determine whether they wish to take advantage of this repatriation opportunity and to assure that the statute's requirements are met.
The AICPA is the national, professional organization of certified public accountants comprised of more than 340,000 members. Our members advise clients on federal, state, and international tax matters, and prepare income and other tax returns for millions of Americans. Our members provide services to individuals, not-for-profit organizations, small and medium-sized businesses, as well as America's largest businesses.
The Repatriation Provision
Under the AJCA, corporate taxpayers may elect to deduct 85 percent of "cash dividends" received from controlled foreign corporations in excess of a base-period amount if the dividends are invested in the United States under a properly approved domestic reinvestment plan. This election is available for either (1) the last tax year beginning before the date of enactment; or (2) the first tax year beginning during the one-year period beginning on the date of enactment. As a result of this opportunity, many companies are expected to revisit their policy of indefinitely reinvesting foreign subsidiary or foreign corporate joint venture earnings in foreign operations.
Questions Specific to Reinvestment Plans (Section 965(b)(4))
For section 965(b)(4) to apply, dividends must be invested in the United States pursuant to a domestic reinvestment plan approved by the corporation's officers and board. The statute lists as qualifying expenditures: (1) hiring and training workers; (2) infrastructure; (3) research and development; (4) capital investments; or (5) financially stabilizing the corporation for the purposes of job retention or creation. The statute and the Conference report indicate that this list is not exclusive. The only expressly disallowed reinvestment use is the payment of executive compensation. Following are some questions.
Question 1.
To what extent do the following expenditures satisfy section 965(b)(4)'s requirement that dividends be "invested in the United States"?
a. The repayment of debt. Does it matter whether the creditors are foreign or domestic? Must debt repayment be related to financial stabilization? If so, how is that demonstrated?
b. Paying current expenses, including non-executive compensation and marketing expenses.
c. Stock repurchases.
d. Paying dividends to shareholders.
e. Acquisitions of U.S. companies. Is there any distinction in the treatment of stock acquisitions versus asset acquisitions?
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Question 2.
Must the investment in the United States be related to the taxpayer's current business operations?
Question 3.
Is a "domestic reinvestment plan" documented internally or is a filing with the IRS required? If filing is required, guidance and forms are needed.
Question 4.
May reinvestment plans be made in the aggregate for each corporation, or must they be created separately for each dividend? What documentation is needed to substantiate approval of the officers?
Question 5.
In the consolidated group context, must the executive officers and board of directors of the U.S. corporation receiving the dividend approve the plan, or can the officers and board of the U.S. common parent approve reinvestment plans for its subsidiaries?
Question 6.
What is the allowable time for reinvesting the repatriated funds?
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Question 7.
Section 965(b)(4)(B) lists certain permitted investments in the United States. The last such item listed is "financial stabilization of the corporation for the purposes of job retention or creation." It is unclear from the statute and the legislative history whether the "for the purposes" clause modifies only "financial stabilization of the corporation" or each item on the list. Please clarify the application of the "for the purposes" clause.
Questions Related to Other Aspects of Section 965
Question 8.
Section 965(a)(1). Can a corporate U.S. shareholder claim a deduction for CFC dividends received by a partnership in which the corporation is a partner?
Question 9.
Section 965(a)(1). The repatriation provision only applies to corporate U.S. shareholders. Assuming that the provisions of section 965, including the plan of reinvestment, are otherwise met, can individual U.S. shareholders form a new domestic corporation to hold their CFC shares to take advantage of the repatriation provision.
Question 10.
Section 965(a)(1). Do cash equivalents (i.e., treasury bonds, bills, certificates of deposit) qualify as "cash" for purposes defining a "cash dividend"?
Question 11.
The section 965(b)(1) limitation on dividends taken into account under section 965(a) requires a "specific amount" of earnings permanently reinvested outside the United States or of associated tax liability be shown on an applicable financial statement. Will a range or approximation of such earnings or tax liability set forth in the applicable financial statement satisfy the "specific amount" standard?
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Question 12.
Section 965(b)(3). How will a guarantee of CFC debt by the corporate U.S. shareholder be treated for purposes of the related party indebtedness limitation?
Question 13.
Section 965(c)(2)(C)(i) states that rules similar to section 41(f)(3)(A) and (B) apply to determine the annual average dividends in the base period years. The base period years annual average dividends are relevant to the determination of the section 965(b)(2) "extraordinary" dividend requirement for qualifying dividends. Additional guidance is needed regarding the application of section 41(f)(3) rules, which relate to the section 41 research and experimentation credit base period determination, to the section 965 base period concept.
Question 14.
Section 965(d)(3) allows a taxpayer to specify which dividends generate the section 965(a) deduction and the accompanying foreign tax credit reduction. Can a taxpayer designate dividends as not being subject to section 965 if it has no "base period amount" as determined under section 965(b)(2)(B) (or the designated dividends would otherwise exceed its base period amount)? What are the mechanics for making this designation?
Questions Addressed in the Proposed Technical Corrections
Questions 15 and 16 relate to matters addressed in the Tax Technical Corrections Act of 2004 (H.R. 5395 and S. 3019) currently being considered by Congress. In the absence of technical correction legislation, Treasury should issue appropriate and necessary guidance with respect to the issues outlined below.
Question 15.
Section 965(d)(2) states that expenses properly allocated and apportioned to the deductible portion of the cash dividend will not be allowed as a deduction. The intended scope of expenses subject to this limitation was discussed in the House and Senate. However, specific guidance is needed on which expenses, direct or indirect, are covered by this exemption.
Question 16.
Section 965(d)(1). Section 902 deemed paid credits are disallowed to the extent that the associated dividend is eligible for the section 965(a) deduction. However, there is no corresponding reduction for the section 78 gross-up associated with the section 902 credit. Logic dictates that the section 78 amount should be reduced in a manner consistent with the foreign tax credit treatment.
We would be pleased to discuss these matters with you in more detail. Please contact us if you have any questions, or if we can be of assistance to you. I can be reached at (402) 280-2062; or you may contact Kenneth Wood, Chair, AICPA International Tax Technical Resource Panel, at (202) 327-8018; or Eileen Sherr, AICPA Technical Manager, at (202) 434-9256.
Sincerely,
Thomas J. Purcell, III
Chair, Tax Executive Committee
cc:
Harry (Hal) J. Hicks, III, IRS Associate Chief Counsel (CC: INTL)
Room 4619 IR, Fax (202) 622-4484
Donald L. Korb, IRS Chief Counsel, Room 3026 IR, Fax (202) 622-4277
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