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Corporations Are Storing Cash Offshore — Across The Hudson River


After Congress called in Apple to testify about its offshore subsidiaries and why it paid only $6 billion in corporate income taxes last year, the Times published this interesting story, clearing up one misconception about how companies defer the payment of taxes on their earnings:

Multinationals based in the United States now hold more than $1.6 trillion in cash classified as “permanently invested overseas.” These funds will face the 35 percent federal corporate tax only if it is returned to the country.

In the convoluted world of corporate tax accounting however, simple concepts like “overseas” and “returned to the country” are not as simple as they appear.

Apple’s $102 billion in offshore profits is actually managed by one of its wholly owned subsidiaries in Reno, Nev., according to the Senate report on the company’s tax avoidance. The money is tracked by Apple company bookkeepers in Austin, Tex. What’s more, the funds are held in bank accounts in New York.

Because the $102 billion is technically assigned to two Irish subsidiaries, however, the United States tax code considers the money to be under foreign control, and Apple is legally entitled to avoid paying taxes on it.

That is, the fact that corporations both earn a lot of cash with honest-to-goodness overseas operations, as well as the more creative operations like Apple’s in Ireland, and then decide not to “repatriate” it because they don’t want to pay the ruinous U.S. corporate tax rate doesn’t mean the cash is literally overseas. Now, this isn’t actually that important — although it does mean the cash sitting here is producing some compensation and creating jobs for money managers and custodial banks — except that it has some real political significance. The concept of billions of dollars in U.S. companies’ cash sitting overseas is a powerful idea for people to relate to — and to be bothered by. Even more appealing, then, is the idea that Congress tried in 2004, and which some Republican primary candidates floated in 2012: a temporary tax holiday for repatriated earnings, which would impose a much lower rate of corporate tax on U.S. companies’ cash overseas (an effective rate of 5.25 percent in 2004’s unfortunately named Homeland Investment Act, which worked by providing a huge tax credit for dividends paid from foreign subsidiaries). This makes sense to a lot of people: There’s all this money sitting overseas, cut off from the market where it could be invested to create American jobs. Why not let all that money come home, taking a smaller slice of it than usual, in order to generate some revenue and drive investment here?

Well, that isn’t how it really works. An NBER study of the results of the 2004 measure found that “repatriations did not lead to an increase in domestic investment, employment or R&D,” because, they conclude, “the domestic operations of U.S. multinationals were not financially constrained and that these firms were reasonably well-governed.” That is, if companies with huge “offshore” reserves saw profitable investment opportunities or R&D projects at home, they will do them, regardless of whether they can cheaply tap the cash of their overseas subsidiaries or not. Multinational corporations aren’t like a kid with a piggy bank; as the NBER paper explains, they usually don’t encounter serious financial constraints, period, and if they have a lot of cash somewhere, that’s about as good as having it anywhere, because they can issue equity or borrow against it.

What actually happened with the money during the repatriation holiday? Corporations brought nearly $300 billion of their earnings home — and, in effect, gave it all to stockholders (despite regulations saying they were specifically supposed to invest it in domestic operations). The paper found that “repatriations did not alleviate any financial constraints” and “firms that valued the tax holiday the most and took greatest advantage of it did not increase domestic investment or employment, instead returning virtually all of the cash they repatriated to shareholders.” Now, as the authors explain, that’s still a good thing for the U.S. economy, since it does mean more cash in American investors’ pockets (it’s also appealing to firms that need to pay dividends, such as Apple, which supports another holiday — they’re taking on debt to pay a huge 2013 dividend, instead). But it’s not what the act was intended to do — get the firms to bring funds back to America to drive economic activity themselves — and amounts to a huge giveaway to the shareholders, who were rewarded with corporate earnings that are more lightly taxed than they should be, a distortion. 

Thus the problem: There’s an intuitive appeal to this idea that corporations have so much cash sitting overseas that they’re not spending here, so people like the idea of bringing it home — but it actually doesn’t much matter whether the cash is there or here, so there isn’t a compelling policy case for succumbing to corporate pressure for allowing them to return it while paying almost no tax on it. Perhaps if more people realized that money was held in banks in New York and being managed by financiers in Nevada, they’d understand a little better the weak economic case for creating a special break to bring those earnings home.

As NR’s editors write today, the right solution is a permanent one, moving to a lower corporate tax rate and a territorial tax regime (where firms owe taxes only on income earned here). Counterintuitively, this good policy is actually just a permanent version of the above, poor policy. But the above policy basically only allows corporations to return their earnings here without paying onerous taxes; it does nothing to affect American corporations competitiveness against foreign firms, or the incentives regarding whether it’s more profitable after-taxes to operate here or abroad – in fact, it’s almost a disincentive to invest in the U.S.’s high-tax environment, if you suspect that you’ll just be able to return your earnings, lightly taxed abroad, to the U.S. almost tax-free during some future repatriation holiday.


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