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The Tax Prophet Newsletter   Issue # 20 February, 2005

REDUCE TAXES!
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In This Issue:
Introduction
Qualifying Investments
Non-Qualifying Investments
Reinvestment Plan Requirements
Conclusion


STRICT LIMITS ON FOREIGN
PROFITS TAX BREAK


Introduction

In order to generate a quick stream of tax revenue, Congress decided to slash taxes on profits held by U.S.companies overseas. Under the American Jobs Creation Act of 2004, repatriated foreign profits will be taxed at a maximum 5.25%, provided those funds are used to stimulate investment in the U.S. economy.

Businesses have a one-year window to take advantage of the lower tax rate. The foreign repatriation mechanism is an 85% dividends-received deduction. Because the foreign profits must be used for U.S. investments, the Treasury and IRS have issued initial guidance imposing strict limits on how companies can use the foreign repatriated profits at home.

Qualifying Investments

There are detailed rules for when repatriated foreign profits will qualify for the tax break. The following are some highlights:

Worker hiring & training:

Repatriated foreign profits used to hire new workers and train current employees working in the U.S. will qualify. While rank-and-file employees can benefit from enhanced compensation and benefits, executives cannot.

Infrastructure, capital investments & intangible property:

Repatriated foreign profits may be used for investments in plants, property & equipment, computer hardware and software. Improvements to these items and expenditures to acquire intangible property also qualify; however, infrastructure and investments must be located in the U.S.

Research & Development (R&D):

Businesses funding R&D projects in the U.S. qualify, provided expenditures are incurred by a U.S. taxpayer.

Debt Repayment ("Financial Stabilization"):

Financially struggling companies can use repatriated profits to repay debts if repayment creates more jobs or retains current workers. Debt reduction must improve cash flow for one of the permissible uses.

Qualified Plan Funding:

Repatriated foreign profits can also be used to satisfy qualified plan funding obligations. Taxpayers must show that financial stabilization of a qualified plan will create or retain jobs in the U.S.

Other financial stabilization initiatives:

Financial stabilization expenditures that retain or creates jobs in the U.S. qualify; however, these expenditures must be approved by IRS on a case-by-case basis.

Acquisitions:

Some business acquisitions may qualify. In general, a new business acquisition in which the taxpayer owns at least 10% of the acquired business may qualify.

Advertising & Marketing:

Expenditures for product advertising and marketing in the U.S. will qualify.


Non-Qualifying Investments

Taxpayers cannot use repatriated foreign profits for executive compensation, tax payments, stock buybacks, dividends and portfolio investments.


Reinvestment Plan Requirements

Businesses are required to prepare a "domestic reinvestment plan" regarding their foreign repatriated profits. Such a plan must describe specific, anticipated investments in the U.S. that will be made within a reasonable time. Even though the tax break is only available for 1 year, investments under a domestic reinvestment plan do not have to be made by that deadline.

Businesses will have some flexibility to adapt their plans to economic changes, but once the profits are repatriated, the plan cannot be modified. There are transition rules that provide an exception for dividends paid before January 13, 2005.

The rules do not require the tracing of the foreign repatriated profits into a qualified investment, however an amount represented by the repatriated funds must be spent based on a formal plan.


Conclusion

The foreign repatriated profits tax-break is designed to boost the U.S. economy by retaining or providing new jobs and investments. For those companies willing to invest in their U.S. operations, the tax-break should provide them with cheap, after-tax dollars.



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©2005 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.