Risk and Section 965 Repatriation

The sheer complexity of the repatriation process can affect business operations, financial performance, and financial reporting, both now and in the future.

Planning for repatriation as part of a broader corporate strategy. Roundtable attendees unequivocally agreed that companies should undertake repatriation in pursuit of a broader corporate strategy, not as a limited, tactical move to gain more favorable tax treatment. This meant, for most companies, that planning for repatriation involved assessing a company’s need for cash both at home and abroad to fund organic growth plans, pay down debt, or make acquisitions. To do so, finance teams examined their subsidiaries’ capital requirements and operating positions in foreign countries and markets — all the while keeping in mind the impact repatriation would have on each unit’s ability to conduct business going forward.

Executing the transactions. Finance executives reported that executing a repatriation under section 965 required a vast series of transactions. To ensure that the process went smoothly, companies engaged a wide range of internal stakeholders in the United States and overseas — including the obvious players, such as finance and tax personnel and business unit managers, and less obvious players, such as HR and corporate communications groups. The CFO of a manufacturing company explained, for example, that the HR staff at her company helped to ease difficult transitions in the company’s overseas operations connected to repatriation. HR, she said, also helped the company decide how to take advantage of labor arbitrage opportunities as it considered how to set its international operating profile going forward. And, as several attendees pointed out, bringing money home under a statute entitled the American Jobs Creation Act created public relations pressure that corporate communications groups were often called upon to handle — particularly when the activities funded by repatriated cash seemed, on the surface at least, to have less to do with creating jobs than with improving the company’s financial and operating footprint.

Reporting, compliance, and investor relations. Another area of concern among roundtable attendees was the potential for reporting and compliance problems. The potential for discrepancies between Form 8K — the “current report” used by most public companies to report material events and corporate changes of importance to investors — and other financial statements was particularly worrisome, said the CFO of one high-tech firm, whose company pursued section 965 repatriation early in the year. The risk of a discrepancy between 8K filings and other financial statements was heightened, the CFO continued, by Treasury Department and financial accounting guidance that fell short of executives’ short-term needs. This dearth of guidance early in the year made financial statements — which include projections of future tax liability — more risky than usual for repatriating companies. As the CFO pointed out, a discrepancy between 8K reporting and other statements could have the potential of forcing a restatement. Investors were already suffering from restatement fatigue, he noted; further restatement would lead to investor-relations problems and punishment in the equity markets.

Attendees also discussed the effect of Sarbanes-Oxley on section 965 repatriation. The executives at the roundtable were not surprised to learn that a large number of material weaknesses in year one of section 404 compliance among all public company filers were tax-related. And although repatriation under section 965 is a one-time transaction, not a repeatable activity, Sarbanes-Oxley requirements still apply to controls over non-routine transactions. The scale and complexity of repatriation transactions, coupled with the potential for uneven controls over non-routine transactions, place the company and its senior executives at risk.


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