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News : Irish Economy Last Updated: Jan 28, 2011 - 5:13 AM

Irish Economy 2011: US multinationals have $800bn on deposit in Dublin; Fact or leprechaunic fantasy?
By Michael Hennigan, Founder and Editor of Finfacts
Jan 9, 2011 - 8:34 AM

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The International Financial Services Centre (IFSC), Dublin.

Irish Economy 2011: It has been proposed that part of a claimed huge cache of $800bn held on deposit by US multinationals in Dublin, could be used to fund investments in new Irish businesses. Is this based on fact or leprechaunic fantasy?

Irish economist David McWilliams has been dreaming of leprechauns in his quest for painless panaceas for his fans. In an article, If I was Taoiseach… what I would do to save Ireland, published in The Irish Independent on Jan 08,2011 and on his own website, McWilliams outlines 10 steps to save the country and besides the absence of his proposal to exit the euro, the menu has the knack of appealing to protected wealthy medical consultants and lawyers at one end of the spectrum and to the desperate unemployed at the opposite end. The word 'reform' does not appear once in the 10-step manifesto of more than 3,000 words.

Taoiseach Bertie Ahern's Fianna Fáil won the  2007 General Election with a manifesto titled 'Next Steps,' which may prove that there is a market for step bromides!

McWilliams' Step 10 says "in the IFSC (Dublin's International Financial Services Centre) there is over $800bn of US multinational money on deposit. This cash is there as a result of the amazing success of the multinationals repatriating their profits to Ireland to avail of the 12% corporate tax rate. But if they want to redistribute these profits to their shareholders they have to pay American corporation tax of 39%. To avoid this, they just keep all this cash on deposit at the IFSC."

The Irish corporate tax rate is 12.5% and the US federal corporate tax rate is 35%. However, the actual tax rates termed the 'effective' rates are lower because of various allowances. In the US, the rate is about 22%.

Whether it's Moses in the desert awaiting a delivery of manna from heaven, the cargo-cultists on the Madang Coast of modern day Papua New Guinea awaiting the white man's gifts or Filipinos who have been searching since 1945 for treasures claimed to have been hidden by General Tomoyuki Yamashita, ('The Tiger of Malaya,' who had taken the surrender of British forces in Singapore in 1942 from General Arthur Percival) in the Philippines during the war years, desperate people are a receptive audience for hope.

However, in the present case, there is no $800bn cash hoard in Dublin.

In December, the Federal Reserve reported that US non-financial companies had $1.93trn in cash and other liquid assets at the end of September 2010, up from $1.8trn at the end of June. Cash accounted for 7.4% of the companies' total assets - - the highest share since 1959.

The US has about 7,000 public companies and of relevance in the Irish context are the big companies in the Standard & Poor's 500, specifically in the health care and information technology sectors. Cash holdings of the likes of ExxonMobil are not of interest.

Of the S&P 500's total $902bn in cash and short-term securities, S&P analyst Howard Silverblatt said IT accounted for 39% at $352bn and health care made up 21% at $193bn.

Microsoft had $43.2bn in cash and short-term securities; Cisco Systems $38.9bn; Google $33.4bn and Pfizer $23.2bn.

The jump in cash holdings reflect spending cuts and restructurings during the recession but also a response to low interest rates. The December Fed flow of funds statement (pdf) shows US corporate debt at a record high of $7.3trn. Cash as a % of this debt was at 26.4%.

Firms need to keep more cash in the kitty if they have large debts because these are raised and repaid in lumps, Andrew Smithers of Smithers & Co, a research firm, told The Economist earlier last year. America’s non-bank companies had held liquid assets worth around 23% of debt in the first quarter - - a bit higher than the average of the past 40 years but still below the levels in 2006.

Last year, JP Morgan Research estimated that 30-40% of the cash holding of non-financial US S&P 500 companies was held overseas.

So 40% of the cash held overseas by IT and health care companies in September 2010 was valued at $218bn but there is no reason to expect that it was all held in Dublin.

This amount is spread across many countries and even though profits are skewed towards semi-tax and full tax havens, the cash can be deposited anywhere outside the US and the main use of such funds is to finance investments overseas. 

US companies are taxed on their worldwide income if it is repatriated to the US, the rate of 35% would apply with an offset for tax paid overseas. However, as tax rates overseas are generally lower, there is an incentive to keep profits overseas.

The White House and the Republicans in Congress have signalled an interest in reforming the system.

A 2004 tax amnesty allowed multinationals to return profits to the US at a tax rate of 5.25%. Companies brought home $362bn, with $312bn qualifying for the relief, according to the Internal Revenue Service. However, it has been claimed that the funds were mainly used for share buybacks suggesting that companies expanding overseas kept their funds there.

Bloomberg reports that companies are using mechanisms already to transfer cash back to the United States tax free and it says Pfizer brought back $30bn to provide the cash component of the purchase of Wyeth.

Bloomberg reported last October on how Google diverts profits to Ireland and then onward to tax-free Bermuda.

McWilliams says that $80bn, 10% of the mythical cash hoard of $800bn, "could be used to set up companies using the US money combined with Irish labour and our tax system, as well as all the networks the multinationals already have here.

Together, we could build these companies, for let’s say 10 years, and then when the companies (in effect subsidiaries) are strong enough, we would float them on the Irish stock exchange and the US companies could repatriate the money tax-free in dividends to their shareholders. This might prove to be a very interesting initiative for them and for us and one where years of doing business together pays off."

There is no crock of gold under an Irish rainbow and even if there was, it would be difficult to envisage US companies risking the wrath of the US Congress at a time of long-term high unemployment, by investing directly on a large-scale, in Irish job projects. Besides, these companies do not get involved in big-scale joint venture projects.

Chip giant Intel does provide venture capital for start-ups and its company Intel Capital has invested more than $9.5bn in over 1,050 companies in 47 countries since 1991. In that timeframe, 175 portfolio companies have gone public on various exchanges around the world and 241 were acquired or participated in a merger. In 2009, Intel Capital invested $327m in 107 investments with approximately 50% of funds invested outside the United States and Canada.

Intel Capital has participated in the 2009 round of funding of $10m for Limerick-based Powervation, which produces systems for improving the energy efficiency of computing gear. The VC unit has also provided funding to Dublin-based AdaptiveMobile Security, a provider of security solutions for mobile telephony.

In June 2010, the value of Intel Capital's portfolio of investments was over $2bn.

Damien Callaghan of Intel Capital, is the chair of an advisory board for the Innovation Fund Ireland while Jim O'Hara, former Intel Ireland general manager, is chair of an Irish Government advisory committee on the so-called 'smart economy' project.

There are always opportunities but Finfacts has argued that the 'smart economy' strategy is doomed to fail. In looking to the future, it of course helps by going to the trouble to first check the facts.

Finfacts articles:

Irish Economy 2011: Rising Irish exports, the 'smart economy' and a jobless recovery

Innovation: Ireland's 'smart economy' strategy, universities and free-lunch entrepreneurship

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