The new U.S. tax law could encourage multinational companies to bring nearly $2 trillion in capital held overseas back to the U.S., resulting in significant implications for global foreign direct investment, or FDI, a United Nations body said in a new report.
The UN Conference on Trade and Development, or UNCTAD, said multinational enterprises and foreign affiliates accounting for about 50% of global FDI stock are affected by the U.S. Tax Cuts and Jobs Act, which includes a one-off tax on accumulated foreign earnings that could free up cash to be repatriated.
According to the agency's report, the most significant change in the tax regime for multinationals is the shift to a territorial system, whereby Washington only taxes income earned in the U.S.
UNCTAD noted that the last U.S. tax break on funds repatriation in 2005 led firms to bring home two-thirds of their foreign-retained earnings. Since then, funds available for repatriation have grown 7x larger, the report said.
"The experience from the last tax break on the repatriation of capital in 2005 would indicate that multinationals could bring back almost $2 trillion, leading to sharp reductions in global FDI stocks," said UNCTAD investment division director James Zhan.
The outward FDI stock position of the U.S. could drop to $4.5 trillion from $6.4 trillion due to repatriations, UNCTAD said. Around 25% of the country's FDI stock is in developing nations, although a large portion of that total is not easily repatriated since it may be invested in productive assets.
UNCTAD said the impact on global investment stocks will ultimately depend on the actions of a few major multinationals including Apple Inc., Microsoft Corp., Cisco Systems Inc., Alphabet Inc. and Oracle Corp., five tech firms that hold $530 billion in cash overseas, or a quarter of the total amount of liquid assets available for repatriation.
The impact will also depend on the reaction of other countries, according to UNCTAD, which is seeing increased global tax competition following the U.S. tax changes.
