Jan 30, 2017

What Would a Tax Holiday for Multinationals' Foreign Earnings Do?

By Gene Balas

When examining policy proposals, it pays to understand certain ramifications beyond the simple premise of an idea. More specifically, consider the repatriation of funds from the foreign subsidiaries of U.S. corporations. (This is not a discussion of lowering the corporate tax rate; rather, this discussion only pertains to the ability of corporations to allow their foreign subsidiaries to repatriate foreign profits to the parent company without tax.) According to a November 25, 2016, Wall Street Journal article, over the past decade, total undistributed foreign earnings of U.S. companies have risen from about $500 billion to more than $2.5 trillion, a sum equal to nearly 14 percent of U.S. gross domestic product.

Now, just what exactly is that pot of money actually doing, when it is held by foreign subsidiaries? Would it boost economic activity if the U.S. had a tax “holiday” to allow repatriation of those funds here? Well, it turns out that it isn’t some unused mountain of cash that is sitting idly by, stockpiled in some warehouse. Instead, those funds are often already here in the U.S., already invested and at work, though they are owned by the foreign subsidiary, according to recent research from the Atlanta Fed.

In 2011, the Senate Permanent Subcommittee on Investigations conducted a survey of 27 large U.S. multinationals. Survey results showed that those companies' foreign subsidiaries held nearly half of their earnings in U.S. dollars, including U.S. bank deposits and Treasury and corporate securities. Consider the table provided by the Atlanta Fed on just how much of those funds are already denominated in dollars and invested in the U.S.:

percentage-of-undistributed-accumulated-foreign-earnings-in-us-banks.png

Those investments may be in the form of securities or bank accounts, of course, but they may also be invested in the physical equipment and structures of operations here in the U.S. A report from the Joint Committee on Taxation notes these earnings “may include more than just cash holdings as corporations may have reinvested their earnings in their business operations, such as by building or improving a factory, by purchasing equipment, or by making expenditures on research and experimentation."

In other words, a foreign subsidiary of a company domiciled overseas may invest in (and own) those facilities here. To put it a different way, those funds are often already put to work here or are invested in U.S. securities, having bolstered share or bond prices long ago. Offering a tax holiday, then, would simply mean that companies wouldn’t have to pay income taxes on profits they’ve earned and already invested in the U.S. Reading between the lines of the Atlanta Fed’s research, it amounts to free cash for corporations, though the researchers explicitly stop short of making that conclusion and avoid making policy recommendations.

It is at this juncture where the interests of taxpayers and investors diverge. Yes, investors might wish for corporations to repatriate those funds without taxes, bolstering profits and allowing companies to invest wherever might be in the best interest of shareholders. However, taxpayers (a group that certainly overlaps with many individual investors) might have a different point of view. But we digress from the economics and enter the realm of fiscal policy, which is not our intention here.

Our focus is to determine whether there might be any economic (or financial market) effect from allowing corporations to avoid taxes on foreign earnings. Note I did not use the word, “repatriate,” since, as noted above, many of those foreign subsidiaries already own U.S. assets. So, from the lens of an economist, not a politician or an investor in an affected company, the net result of allowing the foreign subsidiary to disgorge its profits to the parent company without a tax penalty may not yield economic benefits. As the research demonstrates, those funds are often already here, already invested, and already producing benefits to American workers, consumers and investors. What they are not doing is relieving the fiscal burden of other taxpayers, given the amount of tax these firms would avoid by repatriating funds that by and large are already here.

Disclosure: Investing involves risk, including possible loss of principal, and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this piece is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances. The information and opinions expressed herein are obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital. Opinions expressed are current as of the date of this publication and are subject to change, and they reflect those of the author and not necessarily United Capital. Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Indices are unmanaged, do not consider the effect of transaction costs or fees, do not represent an actual account and cannot be invested to directly. International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and different accounting methodologies.

United Capital Financial Advisers, LLC (United Capital) provides financial guidance and makes recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, United Capital has discretionary authority over investment decisions. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this blog is intended for information only, is not a recommendation, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances. This blog is a sponsored blog created or supported by United Capital and its employees, organization or group of organizations. This blog does not accept any form of advertising, sponsorship, or paid insertions. Certain authors of our blog posts may be influenced by their background, occupation, religion, political affiliation or experience. It is important to note that the views and opinions expressed on this blog are that of the owner, and not necessarily United Capital Financial Advisers. As a Registered Investment Adviser, United Capital does not allow any testimonials on their blog, and any comments deemed as such United Capital will remove.

United Capital does not offer tax or legal advice; therefore all articles should not be taken as such. Please consult legal or tax professionals for specific information regarding your individual situation. All referenced entities in this site are separate and unrelated to United Capital. Any references to any specific commercial product, process, or service, or the use of any trade, firm or corporation name is for the information and convenience of the public, and does not constitute endorsement, recommendation, or favoring by United Capital.