Daily Tax Update - January 13, 2005

Treasury and IRS Announce Guidance on Repatriation of Foreign Earnings
Today, the Treasury Department and the IRS released Notice 2005-10, the first in a series of notices that will provide guidance for U.S. companies planning to repatriate earnings from overseas subsidiaries subject to the temporary reduced tax rate available under section 965, which was enacted as part of the American Jobs Creation Act 0f 2004 (AJCA).  The guidance is generally favorable, with numerous favorable interpretations of the statute on the issues considered.

  • The notice provides detailed guidance regarding the substantive and procedural requirements applicable to domestic reinvestment plans. In particular, the notice provides that a plan must be in writing and "provide sufficient detail to enable the taxpayer to demonstrate upon examination that the expenditures that subsequently occur were of the kind that were contemplated" when the plan was adopted. In addition, the notice states that a domestic reinvestment plan must state a reasonable time period during which the taxpayer anticipates completing all anticipated investments.
  • The notice also describes the kinds of investments in the United States for which repatriated funds may and may not be used, but provides that the listing is nonexclusive. In addition to the prohibition on the use of repatriated funds to compensate executives which is expressly provided for in section 965(b)(4)(B), the notice also prohibits the use of repatriated amounts to, among other things, fund dividend distributions, redeem stock, or make tax payments.
  • The notice also clarifies the requirement that the repatriation be in the form of a cash dividend, describes how a taxpayer elects to apply section 965 to a taxable year, provides guidance on reporting requirements and on how a taxpayer may establish that repatriated amounts are in fact invested in the United States (including a safe harbor), and provides transition rules for taxpayers who adopted domestic reinvestment plans and received a dividend prior to the issuance of the notice.  
  • Treasury's Acting Deputy Assistant Secretary for Tax Policy Eric Solomon said, "Given the importance of the new repatriation provision to U.S. companies, coupled with the immediate effective date of the provision and its temporary nature, issuance of prompt guidance was a major priority. In today's notice we focused on addressing the most urgent questions, particularly the required U.S. investment of the repatriated earnings."
  • IRS Chief Counsel Don Korb said, "This  guidance will allow taxpayers to be able to comply with the new provision regarding the repatriation of earnings while at the same time  giving the IRS examination function the necessary roadmap to ensure compliance with the new rules."
  • For additional information, contact Philip R. West.
  • The notice can be accessed here.  
  • The fact sheet can be accessed here.   

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