Is repatriation of cash really a big deal?

The WSJ and FT disagree on the impact.  I disagree with both.

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Let’s start with some background …

Currently, when a company earns money abroad, it’s taxed in the local jurisdiction where it’s earned … and then the Feds collect U.S. income taxes when the company brings the cash associated with the earnings back to their U.S. accounts.

Most folks agree that represents punitive double taxation.

So, companies tend to keep the cash associated with offshore earnings parked offshore … deferring U.S. income taxes as long as possible.

Currently, the 50 top overseas cash holders have almost $1 trillion parked outside the U.S.

image
click for full top 50 list

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The GOP tax plan moves towards “territorial taxation” … meaning that U.S. companies will only be taxed in the jurisdiction where money is earned.

That makes complete sense to me.

The GOP tax plan also  includes a one-time “deemed repatriation rate” on earnings now held abroad … that rate is proposed to be 14% to 14.49% … lower than the current corporate rate of 35% or the proposed rate of 20%.

Why not a deemed repatriation rate of zero?

I guess the logic is that the current stockpiles of offshore cash were earned under the old double taxation rules … so the companies “owe” the Feds around 35% … offering a deemed rate of 14% roughly splits the difference between 35% and zero.

Here’s were things get interesting …

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The WSJ ran an editorial blasting the Financial Times for editorializing that the 14% deemed repatriation rate “would produce a $47 billion financial windfall for Apple.”

According to the FT:

Apple under the current system would owe $78.6 billion in taxes but under the GOP plan would pay $31.4 billion.

The $47 billion difference is what it calls a “windfall” for Apple.

The WSJ counters:

The FT ignores that under the current system Apple will pay $0 in taxes on that billions overseas because it has no known plans, and little incentive, to return the money to the U.S.

Under the GOP’s deemed repatriation alone, Apple would pay more than $30 billion in taxes.

In other words, the real windfall is the $30 billion in tax revenue that the U.S. Treasury otherwise wouldn’t have.

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I lean towards the WSJ position, but it begs another question:

Why would Apple repatriate any offshore cash at 14% … or any other rate greater than zero?

Apple currently deposit its excess offshore cash in offshore interest-bearing accounts and marketable securities, right?

And, since Apple is a credit-worthy “big dog”, it can borrow in the U.S. at favorable rates … maybe from the the same financial institutions that hold its offshore deposits.

So, those balances – and their corresponding returns and charges – essentially wash each other out, right?

If Apple wants to invest in U.S. operations, it can do so without technically repatriating its offshore cash … it requires deposits and loans that wash each other out … but it can be done.

Bottom line: I’m not expecting the HUGE cash inflow that experts are forecasting at the reduced deemed rate.

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A counter example

GE might benefit from the transitional 14% deemed repatriation rate.

GE is cash-strapped and has had its credit rating dinged.

Since GE may not be able to “wash” deposits and loans at roughly equal rates … and since  it needs the cash stateside … it may make sense for the company to repatriate $35 billion and hand over 14% to the Feds.

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