A provision in the Trump administration's tax reform outline regarding cash held overseas by U.S.-based companies has significant implications for the information technology sector, with large multinational entities like Apple Inc. and Microsoft Corp. holding billions in foreign accounts that could potentially fuel deleveraging or other measures if returned home.
Apple stands out both for the total and the percentage of its foreign cash holdings, with $246 billion in foreign-held cash, cash equivalents and marketable securities as of its last reporting period, or 94% of its total cash and marketable securities. Microsoft had $127.9 billion in foreign-held cash, cash equivalents and marketable securities, or 96% of its total.
Looking at other information tech companies with large total cash holdings, Visa Inc., Oracle Corp., Intel Corp., Qualcomm Inc., Cisco Systems and Alphabet Inc. each carried over 50% of such cash and securities overseas. Hewlett Packard Enterprise Co. did not disclose its foreign cash holdings but noted in a July SEC filing that it holds "a substantial amount [of cash] outside of the U.S."
The list of information tech companies with high percentages of foreign-held cash today also includes many of the same companies that participated in a one-time optional repatriation holiday for overseas corporate cash in 2004. The top 15 companies repatriating in 2004 accounted for over 52% of the domesticated cash, and those companies included Hewlett-Packard, IBM, Intel and Oracle. Microsoft was also a major participant.
Tax experts noted that a key difference between 2004 and today's proposal is that the Trump administration seeks mandatory repatriation as a first step in shifting to a territorial tax structure in the U.S., in which companies pay no U.S. tax on foreign earnings. Under the proposal, a roughly 10% rate would be applied to repatriated assets, with different rates for liquid assets like cash and illiquid assets like real estate. White House chief economic counsel Gary Cohn recently estimated that U.S. companies hold as much as $3 trillion in cash and equivalents overseas.
A purely territorial system could create incentive for companies to hold cash outside the U.S. where tax rates are lower, Eric Toder, co-director and fellow at the Tax Policy Center, said in an interview. However, another central piece of President Donald Trump's tax reform proposal is slashing the domestic corporate rate to 20% from 35%. Under current tax laws, U.S. companies that wish to repatriate cash held overseas must first pay the difference between taxes paid to the foreign state where the earnings were collected and the U.S. corporate tax rate. Historically, that was not much of a roadblock to repatriation, but over the years foreign countries have steadily lowered their tax rates and the U.S. corporate rate has become one of the highest in the world, Toder explained.
Tax analyst and commentator Lee Sheppard, a critic of the policy, argues that many of these companies are abusing the accounting standard with foreign-held cash and then benefiting from a tax holiday. Additionally, companies with deferred foreign earnings in cash often put that cash in liquid U.S. assets already, she noted, so many foreign-held assets are already at work in the U.S. economy. She questioned whether the overseas cash proposal will have any real impact on job creation or create a broad economic stimulus. Since companies still include foreign assets in their total cash position, they often issue low-cost debt in the U.S. to pay for dividends, buybacks and other shareholder-friendly activities for which cash would normally be used, Toder said. Because of this dynamic, many analysts believe repatriation could lead to a substantial reduction in leverage for some companies. As Moody's Investors Service concluded in a December 2016 research note on repatriation, "Comprehensive tax reform that provides better and consistent access to a company's global cash could allow both higher capital returns and lower debt levels, a potentially unique positive scenario for creditors and shareholders."
A 2011 Senate study of the 2004 tax holiday found that the earlier repatriation effort's stated goals — to grow jobs and localize research and development — largely failed to materialize, and instead correlated with a rise in executive compensation and dividend payments.