Why U.S. companies' offshore cash won't rush back home
A vast stash of cash belonging to American multinationals, estimated at $1.6 trillion, sits overseas. This is because high U.S. tax rates dissuade the companies from bringing it home. But the new tax law will attract a large chunk of it back home, boosting U.S. economic growth and jobs.
That's the scenario painted by congressional Republicans and the Trump administration. "All of those earnings are trapped offshore, and the penalty to bring that money back onshore is too high," White House chief financial adviser Gary Cohn told a corporate executives' conference in November. However, there's grounds to doubt that the repatriation, as it's called, will amount to much.
One widely publicized reason: It sure didn't in 2004, the last time this maneuver was tried. But beyond that, a number of other factors exist to curb a bonanza of returning cash in 2018. U.S. companies don't need the extra money, much of it is already is in the country anyway and starting Jan. 1, when the law takes effect, keeping it offshore will remain attractive.
The impetus for Corporate America's gigantic offshore cash trove has been the high U.S. business tax rate that has prevailed for years, 35 percent. Corporate leaders have argued: Why bring home that cash, spawned by overseas profits, and get more than a third sliced off by the IRS? Especially when you can house it in Ireland (12.5 percent corporate tax) or Bermuda (zero percent).
That picture changed with the recent enactment of the GOP tax plan, which lowered the corporate rate to 21 percent, making the U.S. much more competitive internationally.
The offshore money got a particularly sweet deal under the legislation that President Donald Trump signed right before Christmas: The entire $1.6 trillion (some estimates place it higher than $2 trillion) will incur a onetime U.S. tax of just 15.5 percent on offshore profits invested in liquid assets and 8 percent in harder-to-sell assets like real estate. Any foreign-generated cash in the future is subject to a 10 percent U.S. tax, but the formula for that levy makes it effectively only a few percent, according to an analysis by the Tax Policy Center think tank.
The precedent for cash repatriation to boost domestic jobs and corporate capital spending isn't inspiring, however. In 2004, when George W. Bush was president, the U.S. offered a similar tax holiday to attract overseas corporate cash, charging the returning money a low 5.25 percent tax rate. That resulted in $299 billion brought back by U.S. companies, raising hopes in some quarters that a slew of jobs would be created.
Alas, the Senate Permanent Subcommittee on Investigations found in a 2011 study that very few jobs were produced, and most of the offshore money went to mergers, stock buybacks and dividends. In fact, 10 of the 15 largest corporate repatriators ended up cutting jobs.
The three other reasons that cast doubt on widespread benefits resulting from a return of overseas cash:
U.S. companies don't need the money
At the same executive conference at which White House economics adviser Cohn touted the benefits of the tax bill and repatriation, the moderator asked the executives in the audience if they would invest the tax bill's bounty in new plants and equipment. Only a few hands went up.
Corporate capital spending is on the upswing, now that economic growth is finding its feet in the aftermath of the Great Recession. Nonetheless, it isn't boffo.
Overall growth should notch up 2.3 percent in 2017 and 2.8 percent in 2018, said the Conference Board, a research group. That's a small improvement in GDP from the anemic 2 percent annual increases it has been running in recent years. Capital expenditures -- how much companies allocate to new plants and equipment -- is expected to climb 4.8 percent this year and 6.1 percent in 2018. Although decent, that's not a large boost by historical standards.
"In fact, if you look at multinational firms, most of them have record-high after-tax profits compared to earlier years or earlier decades," Kimberly Clausing, an economist at Reed College, said on NPR recently. "Instead, what seems to be holding back investment is lack of good investment opportunities."
Companies have all the domestic cash and borrowing ability they need. Interest rates remain very low. One-year LIBOR, the benchmark rate for what banks charge each other, was 3.1 percent at the end of 2004 (the year of the last repatriation) and is 1.9 percent now. Seven-year AA corporate bonds paid 4.6 percent interest rates at year-end 2004, and now they pay 2.9 percent.
Apple (AAPL), which has 80,000 U.S. employees, holds $252 billion in offshore cash. Does it need that money to fund domestic purposes? Hardly. Awash in earnings, the company raised $7 billion in a bond sale earlier this year. The tech giant has pledged to spend $1 billion on manufacturing in the U.S. Apple recently announced a $390 million investment to revamp an old plant in Texas for Finstar, which makes its facial recognition lasers. That would create 500 jobs.
A lot of the money is in the U.S. economy anyway
The 2011 Senate study estimated that slightly less than half of the offshore cash is invested in various American financial instruments, ranging from Treasury notes to corporate bonds to mutual funds. A lot of it is in U.S. bank accounts.
Last January, the federal Office of Tax Policy, part of the Treasury Department, concluded that these dollars are "held for investment at U.S. financial institutions, and thus contribute to investment and capital formation in the United States." In other words, this money has been put to work building the American economy, even though it technically is housed in foreign lands.
Incentives to keep the cash offshore remain
So after the IRS takes its one-time bite of offshore profits, and once the small U.S. tax kicks in on profits earned overseas from 2018 forward, why would American multinationals need to bring back money to their native soil? While U.S. corporate tax rates now are much lower, they aren't the lowest by far. Aside from Ireland, Liechtenstein charges 12.5 percent as well, and Hungary 9 percent, per the Tax Foundation. In addition to Bermuda, nations that tax companies nothing include the Bahamas and the Caymans.
In a world with no shortage of capital, hauling it back from other lands to the U.S. isn't a priority for many of the nation's large companies. Citing little need for "the funds in the U.S.," Robert Willens, a noted New York-based tax expert, pointed out: "No one is going to bring back this money to build an unneeded factory for the hell of it."