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The 2004 Homeland Investment Act: Ripple Effects
Joseph F. Kovar
The conflict arose between the corporate income tax break and issues over transfer pricing that questioned the amount of profits BMC held domestically. Transfer prices are the prices that occur when a company moves funds between secondary locations offshore, often used to leverage the benefits of lower-tax countries. The transfer put BMC's profits higher, meaning it owed more taxes.
So what exactly is the Homeland Investment Act -- and was its intended aim ever realized?
Congress in 2004 passed the act as part of the American Jobs Creation Act. Under the Homeland Investment Act, businesses were given a one-time deduction of 85 percent of U.S. taxable incomes for extraordinary dividends received from their controlled foreign corporations, with some limitations. That made the effective tax rate 5.25 percent, compared with the normal 35 percent, according to the IRS in a 2008 study.
However, applying for the tax holiday required such corporations file a domestic reinvestment plan showing that the repatriated funds met certain criteria. Such criteria, according to the IRS, included hiring new employees, training existing staff, increasing employees' (but not executives') salaries and benefits, R&D in the U.S., capital investments, certain types of debt repayments, and acquisitions.
They were specifically not allowed by the act to use the funds for things such as "executive compensation, intercompany transactions, shareholder distributions, stock redemptions, portfolio investments, local, state or federal tax payments and purchases of Treasury bills, and municipal or corporate bonds," the IRS reported.
As a result, 843 corporations took advantage of the act to repatriate about $362 billion. In the IT industry, which is included in the "computer and electronic equipment" category, 85 corporations repatriated nearly $69 billion, the IRS reported.
The National Bureau of Economic Research in a June 2009 paper, reported that the bulk of the total repatriations, or about $300 billion, came in 2005 as a result of the act, compared with an average of about $60 billion for the previous five years.
In passing the act, Congress argued the tax holiday would result in creating more than 500,000 jobs in two years, while JPMorgan Securities estimated businesses would increase capital spending by 2 percent to 3 percent during that time, the National Bureau of Economic Research reported.
However, the actual results were different. The research organization, in its study, concluded that "the decreased costs of accessing earnings retained abroad under the (Homeland Investment Act) did not increase domestic employment, investment, or R&D."
According to its analysis, each $1 of earnings from abroad repatriated under the act resulted in an increased domestic investment of less than 1 cent.
However, each $1 increase in repatriations did result in a 79-cent increase in share repurchases and a 15-cent increase in dividends, the research organization reported.
BMC declined to comment on its case, saying that it typically doesn't comment on legal proceedings.
SARAH KURANDA contributed to this story.
PUBLISHED SEPT. 23, 2013