Tax break lets IBM repatriate $9bn

IBM plans to repatriate $9bn of foreign earnings during the current quarter, the latest US multinational to take advantage of a tax break offered by Washington. The information technology group will record a one-off tax charge of $450m in its third quarter earnings.

Under the American Jobs Creation Act, US companies bringing foreign earnings back into the country this year will be taxed at only 5.25 per cent, compared with a 35 per cent standard rate.

The tax break was designed to stimulate the US economy by encouraging companies to bring home capital parked in low-tax juristictions. Wall Street analysts estimate that US companies could reptriate about $500bn by the end of this year, when the preferential rate is withdrawn.

IBM in February said it planned to repatriate $8bn. Earlier this month, it told investors the total would be about $9bn.

The largest such move so far is by Pfizer, the pharmaceuticals group, which is bringing $36.9bn back into the US, resulting in a $1.7bn tax charge.

PepsiCo, the foods group, on Friday said it would record a third quarter tax charge of $475m arising from the repatriation of $7.5bn. Lexmark, the printer company, on Tuesday announced quarterly earnings including a $53m tax charge, equivalent to 42 cents a share.

The charges reflect the fact that companies repatriating earning will pay more tax in the current year than they would have done if the money remained offshore.

Critics of the legislation have questioned whether it will create jobs as intended. Companies do not have to detail how the money will be invested in order to get the tax break. Qualifying uses of the money include research and development, capital investment, pension funding and acquisitions.