Tax Law

Repatriation Tax Holidays and IRC Section 965

By Mary Riley *

The debate over corporate tax reform has largely centered on lowering the corporate tax rate and, more radically, transitioning from a worldwide to a territorial system of international taxation. [Donald J. Marples and Jane G. Gravelle, CONG. RESEARCH SERVE, R40178, TAX CUTS ON REPATRIATION EARNINGS AS ECONOMIC STIMULUS: AN ECONOMIC ANALYSIS (May 27, 2011).] Another proposal, designed to bring about tax relief more quickly to U.S. corporations than waiting for a complete overhaul of the corporate tax system, is to revive Section 965 of the Internal Revenue Code to provide another temporary tax holiday for repatriated corporate earnings. Enacted as part of the American Jobs Creation Act in 2004 [IRC § 965, American Jobs Creation Act of 2004, Pub L 108-356, §271, 118 Stat 1418], Section 965 permitted U.S. corporations with foreign subsidiaries to bring their overseas profits back into the United States at a reduced tax rate. ["Repatriation Debate Fuels 'War of Studies'" - TaxAnalysts® Tax Notes Today, 2011 TNT 236-1 (October 14, 2011)]. Despite the introduction of several bills, no action was taken to enact a new repatriation tax holiday by the end of 2011. Lawmakers in both political parties stated that any action on a repatriation tax holiday in 2011 might adversely affect legislative interest and momentum toward enacting broader corporate tax reform, such as the permanent reduction of the corporate income tax rate or, more radically, transitioning the United States from a worldwide to a territorial system of international taxation. ["Repatriation Tax Holiday Appears Unlikely This Session" - TaxAnalysts® Tax Notes Today, 2011 TNT 236-1 (December 8, 2011)] 

Repatriation Tax Holidays Defined

Tax holidays, defined briefly, are the temporary reduction or suspension of a tax that normally would have to be paid by taxpayers. In an effort to motivate U.S. corporations with overseas subsidiaries to bring their "locked-out" overseas earnings back to the United States without having to pay the 35 percent tax rate on foreign income, Congress instituted a temporary tax holiday on repatriated earnings by enacting Section 965 of the Internal Revenue Code. [IRC § 965].


Unfortunately, several empirical studies evaluating the effectiveness of Section 965 have concluded that repatriating U.S. corporations overwhelmingly failed to use the DRD [dividends received deduction] to stimulate job growth or the domestic economy. These reports conclude that, although Section 965 was wildly successful in encouraging U.S. corporations to repatriate offshore profits, this did not result in an appreciable increase in investment activities or job creation in the United States. Instead, there appeared to be a spike in stock repurchases, shareholder payouts and executive pay, all prohibited uses of DRD funds under Section 965, during or shortly after the time period in which U.S. corporations claimed the DRD... If anything, Section 965 has unintentionally provided another disincentive for U.S. corporations to invest their profits domestically.

... [M]any tax experts conclude that Section 965 only served to provide a giant tax break for U.S.-based multinational corporations, contrary to the legislative intent for enacting Section 965...

Lessons Learned and the 2011 Bills Reviving Section 965

Despite the failure of Section 965 to spur domestic economic investment and job creation, there are lawmakers who support the revival of an improved Section 965 as part of broader corporate tax reform...

... [2011 bills] proposed to amend Section 965 to ensure that the revived Section 965 would achieve what the current version of Section 965 did not: the actual reinvestment of repatriated income domestically to spur economic growth and job creation in the United States. The Freedom to Invest Act, or the Brady-Matheson Bill, was introduced on May 11, 2011. [HR 1834, 112th Cong. (2011-2012)]. ... [It] would permit a U.S. corporation to claim a temporary DRD for repatriated funds at an effective corporate tax rate of 5.25 percent for either tax year 2011 or 2012. U.S corporations who claim the DRD must maintain, but not necessarily increase, employment levels before and after taking the DRD. "Failure to keep employment levels" for at least two years after taking the DRD would result in the corporation's having to declare $25,000 in income multiplied by the number of employees below the employment level. [HR 1834, § 2]...

... [T]he Rebuilding America Act, proposes permanently reducing the corporate tax rate on repatriated earnings to 5 percent. [S 1837, 112th Cong. (2011-2012)]. Four additional bills introduced in 2011 proposed overall reductions of the corporate tax rate and/or reviving Section 965 to provide either a temporary or permanent tax rate reduction on repatriated earnings... [HR 937 (Rising Tides Act), HR 1036 (The Jobs Creation and Innovation Investment Act of 2011), HR 2862 (Putting America Back to Work Act of 2011), S 727 (Bipartisan Tax Fairness and Simplification Act), all of the 112th Congress (2011-2012)].

* Mary Riley is a law graduate of Northern Illinois University and is licensed to practice law in Illinois and South Carolina. A former law associate at Merritt, Flebotte, Wilson, Webb & Caruso, PLLC, in Columbia, South Carolina, she currently works as a law consultant and lives in Chicago, Illinois.


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