Ruling Restricts Use of Repatriated Funds
Companies can’t use foreign profit returned to the U.S. during a one-year tax holiday to repurchase shares or pay dividends to shareholders, the Treasury Department said Thursday.
The ruling may discourage U.S. companies from bringing home as much as $320 billion in profit that they had invested overseas to avoid paying U.S. taxes, analysts said. The rules will particularly affect drug and computer companies, including Eli Lilly & Co., Pfizer Inc. and Hewlett-Packard Co., that base their foreign operations in lower-tax countries such as Ireland.
“A number of companies will view this in a negative light,” said Greg Kelly, a Susquehanna Financial Group analyst.
Until the Treasury Department issued the technical guidance, companies had been guarded about how they intended to comply with the new rules contained in the corporate tax bill that President Bush signed into law in October, Kelly said. The law allows foreign profit to be repatriated at a reduced 5.25% tax rate over one year if the funds are reinvested in the U.S. to create jobs.
The notice by the Treasury Department said the repatriated funds could be used only for hiring and training, capital investment, research and development, debt retirement, pension investment, advertising, acquisitions in the U.S. and acquisition of patent rights.
It prohibits their use for share buybacks, dividend payments, tax liabilities, executive compensation, portfolio investments and new debt instruments.
The notice doesn’t specify whether repatriated funds can be used to settle tort liabilities. In November, Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) and Rep. Pete Stark (D-Hayward) demanded that companies be prevented from settling product liability suits with the lower-taxed funds.
The notice says companies may use the funds to settle “outstanding liabilities” if such payments are vital to the company’s “financial stabilization.”
Merck & Co., which has $15 billion eligible for the tax holiday, may face as much as $18 billion in liability for Vioxx, the arthritis drug it pulled from the market in October because of reports it caused heart failure. Wyeth has reported $6.4 billion in offshore investments and may face $25.6 billion in liability related to its “fen-phen” diet drugs, which also were suspected of causing heart problems.
Lilly shares fell $1.36 to $56.42, Pfizer declined 70 cents to $25.33 and Hewlett-Packard lost 9 cents to $19.95. Merck fell 43 cents to $30.65 and Wyeth lost 59 cents to $41.85. All trade on the New York Stock Exchange.
