The Internal Revenue Service is looking to crack down on what it feels is a form of cash repatriation by corporates that doesn’t generate a tax, according to guidance from the agency. On Friday it issued guidance — Notice 2012-39 – describing its intentions to stop companies from two types of transactions.
“The IRS and the Treasury Department are aware that certain taxpayers are engaging in transactions intended to repatriate earnings from foreign corporations without the appropriate recognition of income,” the IRS said in its guidance. One of the two types of transactions, according to Bloomberg, involves selling a patent from a US company to a foreign subsidiary without triggering an immediate US tax. For the other type of transaction, a company uses its offshore cash to purchase a US company and quickly reorganizes to move the purchased company outside the US.
According to the IRS, “the taxpayer takes the position that neither of the US corporations recognizes gain on the receipt of the cash, and the parent also applies the existing rule under Temp. Regs. Sec. 1.367(d)-1T(c)(1) to include these amounts in income over time and establish a receivable from the foreign corporation. This transaction results in a repatriation of more than $100 ($100 at reorganization and then through repayment of the receivable), but income is only recognized in the amount of the inclusions over time.”
During the heat of the financial crisis, tax-free repatriation, or a tax holiday, gained supporters from all over the political spectrum. They saw repatriation as cheap stimulus to get the economy going again. However, attempts to move the needle on the tax holiday were stymied at just about every turn as both Democrats and Republicans looked to bring about broader tax reform. Companies, including Cisco, Google and Microsoft even started a coalition to try to get another tax holiday a la 2004 Homeland Investment Act. That effort ended in April of this year (see related story here).
At the current high tax rate of 35 percent, many large multinationals choose to keep foreign profits outside the US. Data compiled by Bloomberg in March showed that 70 companies have $1.2 trillion in untaxed profits around the world, up 18.4 percent from a year earlier.