Federal
Incentives
Until
2004 there were few if any general-purpose
inward investment incentives at Federal
level, although there are a number of
support programs aimed at particular sectors
of the economy, eg oil and gas.
However,
the American Jobs Creation Act, passed
in late 2004, introduced a tax break for
domestic manufacturing operations. In
January, 2005, the Treasury Department
and IRS issued guidance on the then newly
enacted deduction, which generally equals
3% of income from domestic production
activities for 2005, rising to 9% by 2010.
The
activities eligible for the deduction
include the manufacture of personal property
such as clothing, goods, and food, in
addition to software development, film
and music production, electricity generation,
natural gas production, water supply,
construction, engineering and architectural
services.
The
domestic production activities deduction
provides a tax saving on profits from
production activities in the United States.
It is based on a portion of the taxpayer's
profits and increases proportionally as
those profits increase. "This
provision has widespread impact across
our complex economy," commented IRS Commissioner
at the time, Mark W. Everson. "The
guidance strikes a balance. It provides
clear practical guidelines that are administrable
both from the taxpayers' and the IRS'
point of view,” he added.
In
addition, the AJCA offered a temporary
reduction of taxation of repatriated foreign
dividends. In January 2005, Treasury and
IRS issued a notice (Notice 2005-10) that
provided guidance to companies on the
domestic reinvestment plan requirement
under the new provision. The notice specified
permitted investments in the United States
for which the repatriated funds may be
used under this provision.
The
new notice (Notice 2005-38) provides additional
guidance on the amount of dividends that
qualify for the dividends received deduction.
Further, Treasury and the IRS announced
their intention to issue a third notice
that will address the impact of section
965 on a corporation's computation of
its tax liability.
A
copy of the regulations can be accessed
at: http://www.ustreas.gov/press/releases/reports/n200538.pdf
In May, 2005, the Treasury Department
and IRS announced the second in a series
of notices that provided detailed guidance
for US companies that elect to repatriate
earnings from foreign subsidiaries subject
to the temporary reduced tax rate.
The notice provided guidance to companies
on what constitutes a qualifying dividend,
the impact of mergers and acquisitions
and issues related to the section 78 gross-up.
Internal
Revenue Code section 965, enacted as part
of the AJCA in October 2004, was a temporary
provision that allows a US company to
repatriate earnings from its foreign subsidiaries
at a reduced effective tax rate provided
that specified conditions and restrictions
are satisfied. Section 965 provided that
a US company may elect, for one taxable
year, an 85 percent dividends received
deduction for eligible dividends from
its foreign subsidiaries, giving it an
effective 5.25 percent tax rate on qualifying
dividends.
In
October, 2005, the Treasury Department
released new guidelines clarifying the
scope of the aforementioned tax break
on manufacturing income passed as part
of the AJCA, although somewhat controversially,
software purchased online was omitted
from the regulations.
The
provision in question, expected to be
worth $76.5 billion over the decade following
its introduction, created a deduction
rising from 3% to 9% for qualifying US
firms for domestic manufacturing activities,
effectively reducing their corporate tax
rate initially to 32% from 35% through
2010. The new rules sought to build and
expand upon the initial guidance (see
above) issued by the Treasury Department
in January.
The
deduction applies to goods manufactured,
grown or extracted in the United States
and includes architectural services, construction,
engineering, film development, and utilities.
The
rules also encompassed software development,
although somewhat controversially, they
only applied to software which can be
physically purchased by consumers on a
medium such as a disc, and did not apply
to software downloaded to a personal computer.
However, Treasury spokesman Taylor Griffin
stated that the department has asked firms
for additional comments on the new rules,
and is still "open to ideas for better
ways to draw the line".
Defense
contractors and other businesses engaged
in contract work for the government were
to be allowed to participate in the tax
break under the new guidance, as were
manufacturers of certain components of
a product.
The
rules also contained guidance on how home
builders should treat the cost of land
in determining the value of their tax
break from home sales. The regulations
are effective for taxable years beginning
after December 31, 2004.
In May, 2006, the US Treasury Department
performed a U-turn over software services
by including them in final regulations
governing the application of the AJCA
manufacturing tax deduction.
The
Treasury revealed that in response to
more than eighty comment letters received
regarding the proposed regulations, the
final regulations provide many additional
comprehensive rules, definitions, simplifying
conventions, and examples to ease the
administrative burden on taxpayers.
The R&D tax credit is available for
qualified research and development expenditures
incurred only in the United States. The
credit expired most recently on 31st December,
2007, and has been extended 12 times since
originally enacted into law in 1981. The
credit gives a deduction equal to 20%
of R&D expenditure over the previous
base amount. Nearly 18,000 companies,
including S corporations, claimed USD6.6bn
of the R&D tax credit in 2005, the
latest year for which data is available.
An alternative simplified credit method
currently allows taxpayers to forego the
traditional research credit in favor of
a simplified version equal to 12% of qualified
research expenses exceeding half of their
average qualified research expenses over
last 3 years.
In
June, 2009, a bipartisan group of United
States Senators introduced new legislation
to improve and simplify the research and
development (R&D) tax credit.
Under
current law, the R&D provision is
composed of two credits – a traditional
credit and the alternative simplified
credit – both of which provide US
firms a tax credit for incremental qualifying
research expenses, such as labor and equipment
costs.
The
new proposal, would allow the traditional
credit to expire in 2010 and increase
the alternative simplified credit, which
is currently set at 14% of qualifying
expenses, to 20% of qualifying expenses.
Companies would be given the option to
claim the credit under current law in
2009 and 2010 in order to have time to
adjust their accounting and effectively
shift to the new, improved simplified
credit.
“In
this global economy, research and development
by American companies is critical to our
economic recovery and the long-term global
competitiveness of our country,”
said Finance Committee Chairman Max Baucus,
a Montana Democrat. “Much of our
economic vitality comes from the innovation,
research, and intellectual property stemming
from this tax credit. Our bill would make
it easier to access the benefit, making
the credit work even more effectively
and continue to lead the way to new technologies,
domestic job growth and, ultimately, a
stronger US economy.”
“Research
and development is clearly the lifeblood
of not only Utah’s, but the nation’s
economy,” commented Orin Hatch,
a Utah Republican. “And as we increase
productivity through research and innovation,
we will be in a better position to deal
with our looming budgetary challenges.
We need a strong and permanent research
credit to encourage the kind of growth
that will create these good jobs in Utah
and elsewhere across the nation.”
First
enacted in 1981, the Senators said that
the R&D tax credit has been a “powerful
and effective incentive for firms to increase
research spending.” If enacted,
Baucus and Hatch believe their bill would
extend the credit, and provide a stronger
alternative simplified credit that addresses
changes in business models and economic
circumstances that currently prevent some
businesses from getting full benefit of
the credit.
The
alternative simplified credit was added
in 2006 for tax years beginning after
December 31, 2006.
The
Bacus-Hatch bill is supported by eight
other Senators, all serving on the Finance
Committee.
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