publicly traded US companies have about $1 trillion in cash stashed abroad

That’s the best number I could come up with–admittedly through a fast internet search.

It’s not the exact figure that I find interesting, though, but the motives companies have for doing so.  Three of them are well-known, two less so.

the well-known

–Multinational companies have operations in many countries.  It may be that much of their growth–and all of their possible acquisitions–will be outside the US.  It makes no sense to move money back to the US, pay 35¢ on the dollar in Federal income tax and then resending the net amount abroad to make a foreign acquisition.  A CEO might, and probably should, lose his job for allowing this to happen.  Also the official reason companies cite for not returning cash to the US is that the funds are permanently invested internationally.

–Versus other countries, the IRS is unusually harsh in the way it taxes earnings repatriated from abroad.  There has already been one discount deal, the Homeland Investment Act of 2004, offered by the IRS to allow corporates to repatriate cash without the stiff tax bill.  The terms were:  tax at 5.25%, but all money brought back had to be invested in hiring new workers or building new plant.

As it turns out, aggregate hiring and plant construction didn’t rise during the amnesty period, even though about $300 billion was repatriated, making the case for another HIA a bit shaky.  Nevertheless, the possibility of a new HIA is a powerful deterrent to repatriation.  Who wants to be that idiot who paid $3.5 billion on a $10 billion repatriation a month before HIA II is enacted?

–Big corporates can borrow a ton of money very cheaply in the US.  APPL did it last year, for example, and the company seems to be warming up for another tranche in the near future.

the other two

–Companies have found a workaround.  It doesn’t count as repatriation if you keep the money in the US for less than 90 days and don’t get money again from the same source for a certain amount of time.  So multinationals have created daisychains of intracorporate loans, whose effect is to keep cash permanently in the US.  The first loan comes, say, from Hong Kong.  Three months later, it is repaid with cash from, say, Ireland.  That loan is repaid with money from, say, Switzerland.  And the Swiss loan is repaid with fresh funds from Hong Kong…  Ingenious, yes, but most owners would wish, I think, that corporate minds be put to more productive uses.

–In recent years, companies have boosted eps growth by tax planning, that is, by opting to recognize profits in low-tax jurisdictions.  A generation ago, investors wouldn’t have allowed this.  The market back then would only pay a discount PE for earnings that weren’t fully taxed at the rate prevailing in the firm’s home country.

No longer.  As far as I can see, investors are now indifferent to the tax rate firms pay.  The market no longer discounts earnings taxed at a low rate.  So managements have every incentive to recognize profits in low-tax countries.  After all, it takes $1.50 in pre-tax earnings in the US to produce a dollar of net.  That’s 50% more than a US firm needs to produce the same net from Hong Kong.

More than that, suppose a firm suddenly got it into its head to recognize all its earnings in the US.  What would happen to profits?  There’s an easy way to find out.  Just look at the actual corporate tax rate and adjust it to 35%.  If the actual rate is 25%, then each dollar of pre-tax becomes 75¢ of net.  At 35%, each dollar of pre-tax would be 65¢ of net–a 14% drop.  What CEO wants to report that earnings growth is slowing–or worse, disappearing–because he’s monkeying around with the tax rate?






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