Tags: shidlo | cash | hoard | overseas | tax

Let’s Bring Home all the Cash Obama Has Scared Away

Tuesday, 02 Aug 2011 07:52 AM

Recent reports suggest that U.S. companies are hoarding $1 trillion in cash.

What is amazing is that about one-quarter of those funds are held overseas by companies due to tax considerations. At current taxation levels, if a company repatriated its cash hoards held in Ireland, Switzerland and other foreign countries they would have to pay over 35 percent U.S. corporate taxes (although they can deduct the taxes they have paid overseas).

So which companies are holding the largest amounts of cash outside the United States?

As of March, Microsoft held an astounding 84 percent of its $50 billion cash overseas; Apple held 61 percent of its $65.8 billion in cash or equivalents overseas; Cisco held 89 percent of its $43.4 billion.

Other U.S. companies like Google, Oracle and Ford hold tens of billions of dollars in cash with a large proportion of it overseas.

Technology companies hold the most in cash, with pharmaceuticals ranking second, energy third and the consumer-goods sector fourth.

Bipartisan support for repatriation is lobbying the Obama administration but it is obvious that a generous repetition of the tax holiday in 2004 under the American Jobs Creation Act is unlikely. This act effectively reduced the U.S. tax rate on foreign repatriations to 5.25 percent from 35 percent.

Although companies were supposed to create jobs with the repatriated funds, a lot of the funds were used to either buy back shares or increase dividends. Leading U.S. Democrats (such as President Bill Clinton, Sen. Kay Hagan, D-N.C., and Sen. Charles Schumer, D-N.Y.) all support establishing an infrastructure bank that would use funds from tax repatriation to create U.S. jobs.

While history doesn’t always repeat itself, it is more likely that companies that repatriate cash from overseas would buy back shares than increase dividend payments, both for tax reasons and to indicate to shareholders that this is a one-time event.

Unless companies find takeover targets overseas (for example, Microsoft’s recent takeover of Skype for $5 billion), there will be pressure by shareholders to repatriate at least some of their cash held overseas and invest it in the U.S.

Shareholders may also push high-tech companies that are rich in cash and don’t need to create more jobs to buy back shares.

One other way to buy back shares or give a dividend without repatriating funds is to issue a low-cost bond like Microsoft did in 2010 and use the funds to pay for the former.

Buying shares of U.S. high-tech companies holding a large proportion of their cash overseas has a possibility of being profitable for shareholders if the current political atmosphere will allow for it.

Creating U.S. jobs should be a top priority for any repatriation program but reality shows that not all companies have a necessity for more employees, especially in the high-tech sector.

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