When President Trump rolled out his tax reform proposals in late September, investors took the proposals as a good sign as stocks moved higher and the domestic indices all spiked to new highs after the announcement. One of the biggest reforms deals with repatriating cash and cash equivalents at a lower tax rate than the current corporate income tax rate. The hope is that companies will accept the lower rate and move these assets back to the United States, but it isn’t clear whether corporations will move any of the assets back or what percentage they might move back.
So how much cash are we talking about? The following table was produced from information in an article from Bloomberg that was released in June. The top 30 companies in terms of cash being held overseas have $764.4 billion being held outside the United States. Apple alone has over $200 billion.
It would be completely unrealistic to expect all $764.4 billion to be repatriated, but even if half of it is brought back to this country we are talking about $382.2 billion being pumped in to the economy that could be used on capital expenditures, dividend payments, share buybacks, etc. It would also mean a $38 billion windfall for the US government with the 10 percent rate of taxation proposed in the Trump tax plan.
Is a 50 percent repatriation rate realistic? That’s hard to say. Many of the companies on the list have tremendous global operations and would likely keep at least half of the money offshore. If the rate of repatriation was only 25 percent, it would still be a significant bump in money in to the domestic economy and a pretty decent windfall for the government, but anything less than a 25 percent rate would be a disappointment I would think.
How would the companies use the cash they repatriated? Would they use them for expansion purposes? Would they use them to increase existing dividends? Perhaps a special one-time dividend?
All but three of the stocks on the list pay a regular dividend- Alphabet, Amazon and Biogen. Microsoft pays a regular dividend and back in 2004 they paid a special dividend of $3.08. That dividend came at a time when the company was sitting on $50 billion in cash and at the time it was the largest corporate payout in history. Now Microsoft is sitting on $126 billion in cash with 97 percent of it being held overseas at this time.
EU’s Actions Could Boost Rate of Repatriation
Earlier this week the European Union took action against Amazon and ordered the government of Luxembourg to recoup $294 million in taxes from the company. The taxes had been waved in a financial package that served as an incentive for the company to do business there. In the same announcement, the EU said it is pursuing lost tax revenue from Ireland for a deal with Apple.
Should the EU continue pursuing lost tax revenue offered to American companies for incentives, this could obviously have a great influence on the rate at which companies choose to repatriate assets. These financial packages offered by European countries are a big reason why American companies maintain such large cash balances overseas, so removing the incentives will have a huge impact. The timing for the EU’s couldn’t have come at a worse time given the revealing of the Trump tax reform last week.
Of course all of this speculation is predicated on Congress approving the tax reforms and it will also depend on how soon they can get it done. The inability to get any changes made to the healthcare bill is certainly seems to be weighing on the minds of investors. While the indices have been moving higher since the tax reform plans were revealed, the moves have been a little tepid.