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.

Managing risk while conducting business post-repatriation. The risk of an IRS challenge and of compliance and reporting failures troubled executives at repatriating companies. The U.S. Treasury Department’s initial guidance on section 965, while issued quickly, left many questions about domestic reinvestment plans, tax credits, and other important points unanswered for much of the year. Although most of these questions had been settled at the time of the roundtable discussion by the first two rounds of administrative guidance (the third round had not yet been issued), finance teams acting earlier in 2005 had to make critical and far-reaching decisions despite substantial uncertainty. Meanwhile, companies that waited for outstanding questions to be settled by the Treasury Department now find themselves pressed for time, and may be forced to act quickly — a situation that inherently increases risk.

Attendees discussed several techniques to manage the risk of challenge or restatement:

Tracking funds. Section 965 requires that the dollar amount of qualifying dividends be invested in the United States according to a domestic reinvestment plan that cannot change once the dividend is paid. This plan must be made available to the IRS upon request and cannot payouts. The rules do not, however, specify strict tracking requirements for repatriated funds.

While most attendees agreed that the segregation of repatriated funds into earmarked accounts would be too time-consuming and cumbersome to yield benefits, repatriating companies made efforts to track these funds to head off any possibility of reversal while keeping their asset accounts streamlined. A treasury executive from a major pharmaceutical company, for example, explained that his company had altered its accounts payable processes to account for and track repatriated funds as they were spent. In general, attendees agreed that — while it was important to treat the need to track repatriated funds prudently — a balance should be struck between caution and flexibility to preserve the benefit of repatriating in the first place.

Monitoring future events and activities that might cause the IRS to challenge a repatriation. After completing a repatriation, companies should exercise a reasonable degree of care when engaging in activities that might trigger IRS scrutiny of the deduction taken for repatriated funds. While the activities that might draw IRS attention vary, one group of activities that attendees agreed might require an especially watchful eye during the two-year period following repatriation was mergers and acquisitions — an especially important set of considerations since many companies are planning to use repatriated cash for acquisitions.

This article is excerpted and adapted from The Broad Implications of Section 965 Repatriation, which explores how section 965 repatriation fits into broader corporate strategies, both in the near and long term. CFO Research Services and Deloitte Tax LLP developed the hypotheses for this research jointly. Deloitte Tax LLP funded the research and publication of the findings; CFO Research Services produced the final report. You may download a copy of the full report by filling out a brief form.

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