The American Jobs Creation Act

STATUS
On July 21, 2005, House Ways and Means Committee Chairman Bill Thomas (R-CA) introduced the Tax Technical Corrections Act of 2005 (H.R. 3376). Senate Finance Committee Chairman Grassley (R-IA) and Senator Baucus (D-MT) introduced companion legislation in the Senate. The proposed legislation makes clarifications to the repatriation provisions of the American Jobs Creation Act of 2004 (AJCA). Specifically, the legislation would give the U.S. Department of Treasury explicit regulatory authority to prevent avoidance of the related-party indebtedness provision under Section 965(b)(3) of the tax code. Under the AJCA, eligible dividends will be reduced if a company has an increase in related-party indebtedness after October 3, 2004. A full description, prepared by the Joint Committee on Taxation, of the bill can be found at http://www.house.gov/jct/x-55-05.pdf.

The IRS has issued three sets of notices providing guidance to companies on implementing the repatriation provisions of the AJCA of 2005. The first notice, issued in January 2005, clarified which investments would be permitted and which ones would be prohibited under the company’s “domestic reinvestment plan.” The AJCA required companies to complete a “domestic reinvestment plan” in order to take advantage of the tax break. The second notice provided guidance on what constitutes a qualifying dividend, the impact of mergers and acquisitions and issues related to the section 78 gross-up. The most recent notice, issued in August 2005, focuses mainly on computational issues. Copies of the all three notices can be found on the IRS Website.

BACKGROUND
On October 22, 2004, President Bush signed the American Jobs Creation Act of 2004. The AJCA allows companies, on a one-time limited basis, to repatriate offshore cash balances at a reduced tax rate. The act temporarily reduced the 35 percent rate and replaced it with a 5.25 percent rate on dividends in excess of normal distributions from foreign subsidiaries. That is, if an American company’s foreign subsidiary turns a profit and wants to return that profit to the American company as a dividend, the dividend is taxed at 35 percent minus any taxes paid abroad. Those electing to take advantage of the lower rate would forfeit their ability to use the foreign tax credit on the funds subject to the 5.25 percent rate. Repatriation is voluntary. Companies have the option of taking advantage of the HIA or continue operating under the existing system.

AFP ACTION
AFP supported the enactment of the Homeland Investment Act. AFP is a member of the Homeland Investment Act Coalition, and participates in HIA coalition efforts as the IRS implements the act.