US firms get big tax break on foreign cash that is in United States
President Trump says Republican Party tax cuts will prompt US companies to bring home the trillions of profits they have kept overseas and the multinationals will invest the money in American jobs and plants. It’s a fantasy as most of the so-called foreign cash is already in the United States.
"Some people say there are $2 trillion dollars overseas, I think it's $5 trillion," Trump said during the campaign. "By taxing it at 10% instead of 35%, all of this money will come back into our country. We will turn America into a magnet for new jobs ─ and that means jobs in our poorest communities."
The Republicans in the Congress are currently working on reconciling tax bills, which passed by the House of Representatives and US Senate. Both bills provide for a cut in the corporate headline federal tax rate from 35% to 20%.
The US Senate bill provides for a one-time tax on repatriation of foreign profits of 10% for cash and 5% for illiquid assets compared with the 14% and 7% rates the House has proposed.
There are estimates of from $2.5 to $3 trillion in total foreign cash (including financial companies) but Apple illustrates that cash which is said to be held by mainly its Irish shell companies, is in the United States.
Apple's cash and marketable securities reached $268.9 billion at the end of the company's fourth fiscal quarter last September, with $252.3 billion identified as located outside the United States.
While Apple reported zero long-term debt in the fiscal year 2012, the company had about $100 billion in long-term debt on its books at the end of its fourth quarter. It had raised debt to pay for share buybacks and dividends as it would have had to pay a rate of 35% if it had used what was called unrepatriated profits.
Apple’s third quarterly report showed $261 billion in cash and marketable securities and it attributed $246 billion — to its foreign subsidiaries. According to Bloomberg, about $58 billion of the total was invested in US Treasuries (federal government bonds) and US agency securities such as those backed by federal mortgage financiers Fannie Mae and Freddie Mac. An additional $150 billion was invested in corporate bonds. Bloomberg said Apple doesn’t detail the companies that issue the bonds but says it generally invests in dollar-denominated assets with maturities of less than five years. Apple has also cash in US banks in the names of its Irish shell firms.
The five companies with the most cash supposedly overseas are Apple, Microsoft, Google, Cisco and Oracle — almost $600 billion according to a report from credit rating agency Moody's.
Apple, for example, has repeatedly lied that two-thirds of its profits were generated overseas.
Moody’s noted in November:
“total offshore cash held by US non-financial corporates will reach about $1.4 trillion, or 72% of total cash, in 2017, up from Moody's estimate of $1.3 trillion, or 70% of the total, the previous year. The top five cash holders' overseas cash will likely reach about $594 billion, or 88% of their total cash, at the end of calendar 2017, up from $512 billion, or 88% in 2016.”
The technology sector's share of total cash is forecast to approach 50% by the year-end, up from 47% last year.
McKinsey consultants said in an analysis last June:
“Our analysis of the balance sheets of the 500 largest US-based nonfinancial companies confirmed that they had a combined market capitalization of $17.9 trillion at the end of 2016 and revenues of $8.9 trillion. Their $1.66 trillion reserves in cash and near-cash investments amounted to around 10% of their total market capitalization and nearly 20% of their revenues. And while companies do need to hold some cash to do business, in the past we’ve found that companies can typically do with cash balances of less than 2% of revenues. Conservatively, we estimate that about $1.5 trillion of the total cash is above the 2% threshold. That’s how much cash companies are holding beyond what finance theory tells us is necessary — but it still doesn’t tell us how much could be repatriated… Most large pharmaceutical companies, for example, are expected to grow revenue less than 5% a year and would only need to invest less than about 15% of the profits back in the business to continue growing at that pace. The other 85% or so would normally be returned to shareholders unless the company has attractive acquisition opportunities. The same holds true for the large technology companies. Although some are expected to grow faster, they also have higher returns on capital.”
In 2004 there was a special 5.25% tax rate to encourage companies to repatriate profits to boost “job creation” — Pfizer, the drugs firm, was one of the big beneficiaries of the tax break and within 2 years it had fired 10,000 American workers.
Chart on top: Fortune 500 companies with most subsidiaries in tax havens.