Tax Proposal Could Pave the Way for Companies to Bring Money Back to U.S. -- 2nd Update

By Tatyana Shumsky Features Dow Jones Newswires

A lower, but mandatory, tax on offshore earnings could pave the way for U.S. companies to repatriate more than $1.3 trillion currently parked overseas.

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U.S. nonfinancial companies held a record $1.8 trillion in cash at the end of 2016, of which roughly 70% was parked overseas, according to Moody's Investors Service.

The House Republican tax plan proposes a mandatory 12% one-time tax on pre-existing foreign earnings, regardless whether that cash is repatriated to the U.S. That rate would rise to 12.5% if paid over 8 years in equal installments. The Joint Committee on Taxation estimates the overall change would increase revenues by $223.1 billion over the 2018 to 2027 fiscal years.

Under the proposal, companies would be able to bring future profits back to the U.S. tax-free.

American companies currently pay taxes on their foreign profits in the countries where those profits are earned. The U.S. taxes profits companies make world-wide at 35%, minus any foreign taxes paid. In some instances they may pay as little as 5% on their overseas earnings to foreign governments, said Ron Graziano, accounting and tax strategy at Credit Suisse HOLT.

Companies are likely to hold out moving cash around now, as the bill makes it way through Congress. But even if signed it is unclear if the lower tax rate would be a boon to business investment in U.S. Finance chiefs could use that money to extinguish any debt, because the tax bill would also curtail the deductions businesses get for the interest they pay on debt.

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U.S. companies held a total $4.95 trillion in debt at the end of 2016, up from $3.12 trillion in 2010, according to Moody's. Many cash-flush companies with high offshore earnings tapped U.S. debt markets to finance their domestic operations without repatriating their overseas earnings.

Both the incentive to borrow money in the U.S. and keep overseas earnings out the country will be scrapped under the new tax rules, said Robert Willens, an independent tax analyst who teaches at Columbia University's business school.

"If you can repatriate earnings without any additional pain and the interest on the debt is no longer going to be deductible, wouldn't it make sense to repay the bonds?" Mr. Willens said.

Five technology companies -- Apple Inc., Microsoft Corp., Alphabet Inc., Cisco Systems Inc. and Oracle Corp. -- could collectively contribute more than $70 billion to Uncle Sam's offshore cash tax haul.

The companies held $594 billion in overseas cash at the end of 2016, according to estimates by Moody's. Based on the House proposal's 12% one-time mandatory tax on foreign earnings, these five companies could pay $71.28 billion on their offshore cash holdings.

"We've been saying for a number of years that we really need reform, corporate tax reform," said Luca Maestri, chief financial officer at Apple, on the company's February earnings call.

"Obviously, we would be looking to bring the cash back, and that would give us additional flexibility around our capital return activities," he said at the time. Apple is due to report earnings after markets close Thursday.

"By modernizing the U.S. corporate tax code, tax reform will unleash a new wave of innovation, investment, and entrepreneurship in the United States," said a Cisco spokeswoman in an emailed statement. "Cisco looks forward to working with Members of the House and Senate as this proposal moves through the legislative process."

Representatives from Apple and Alphabet didn't immediately respond to request for comment. Spokeswomen from Oracle and Microsoft declined to comment.

Still, cash-flush CFOs may not view paying down debt as their top priority.

"When you're deploying capital you're looking for the best possible return," Mr. Graziano said.

"The options could be buying back cheap shares, buying another company or paying back debt, which might not generate the best returns because interest rates are very low," he added.

The new rules also free up CFOs to decide where to best deploy capital. While current rules disincentivized companies from repatriating offshore earnings, the House tax proposal would remove that obstacle.

"It makes the U.S. tax system neutral as to whether you invest outside the U.S. or in the U.S.," said Pam Olson, PricewaterhouseCooper's Washington National Tax Services Leader.

"If they're better deployed outside the U.S., they will stay outside the U.S.," Ms. Olson said.

Write to Tatyana Shumsky at tatyana.shumsky@wsj.com

(END) Dow Jones Newswires

November 02, 2017 17:02 ET (21:02 GMT)