- US companies have more than $2.1 trillion abroad.
- 12 years have passed since the last tax holiday.
A tax holiday is a government incentive to businesses where it lowers or eliminates a tax for a period of time. The most interesting tax holiday for investors is a corporate income tax holiday on the repatriation of foreign cash. Typically, any repatriated cash is subject to a 35% corporate income tax and therefore US corporations are reluctant to repatriate it and keep their cash abroad. The last tax holiday was voted by Congress in 2004 when companies where allowed to repatriate cash at a 5.25% tax rate. Many companies took advantage and repatriated billions of dollars. 12 years have passed since then and it is time to look at what the investment opportunities are related to an eventual new tax holiday.
As 12 years have passed since the last tax holiday, US companies have stashed billions of cash abroad. The leader is Apple Inc. (Nasdaq: AAPL) with 93% of its $232 billion of cash and marketable securities abroad. If that cash would be repatriated now, AAPL would have to pay $75 billion in US taxes. In the meantime, AAPL’s cash is invested in marketable securities and earning interest. Alphabet Inc. (Nasdaq: GOOG) also has a large percentage (not disclosed) of its $75 billion cash and marketable securities abroad.
A report from October 2015 estimates that US companies hold $2.1 trillion overseas and by doing so avoid paying $620 billion in taxes. The below figure shows the companies with the largest overseas cash balances and how much they have stored overseas.
As the above data is from 2014, the total amount of cash abroad has surely increased due to the high overseas profits US corporations have. All this cash could do wonders for the US economy, businesses and the stock market, but this is more of a political rather than an investing or economic issue for now.
As the US GDP is around $18 trillion, the $2.1 trillion in cash abroad owned by US companies is a sweet and attractive cake. As companies are taxed on an individual legal entity basis, there is no legal way of forcing companies to repatriate cash and pay US corporate income tax on it because the US has no jurisdiction on their foreign subsidiaries. Therefore, in order to get some benefits, the US government could allow a tax holiday. A holiday would not mean that corporations pay nothing, but that the tax is lowered to a point where corporations find it attractive to bring the cash back home. A low tax would also create an immediate benefit for the US. The last time there was a vote for a proposed tax holiday in 2009, the US Senate voted against such a proposal. The vote was mostly based on the US Senate’s research on the last tax holiday when in 2004 the America Jobs Creation Act (AJCA) permitted U.S. corporations to repatriate income held outside of the US at an effective tax rate of 5.25% instead of the top 35% corporate income tax rate. Proponents of the tax provision argued that increased domestic cash would spur investments and job creation. But, as the research shows that was not the case; US jobs lost rather than gained because the top 15 repatriating companies reduced their workforce by 20,931 while stock repurchases and executives’ compensation increased. Of course, such a report has to be taken with a grain of salt because several other factors affect jobs and corporate politics other than repatriations and there is no counter test to see what would have been the effect on jobs without the tax holiday.
There is continuous lobbying for a tax holiday and we will have to see how the current slowdown in GDP growth will affect decision makers. The last commotion around a tax holiday was in 2014 when APPL’s CEO Tim Cook commented that the 35% tax rate on repatriated cash is a very high number and that APPL would repatriate at a lower, more reasonable tax rate. A senatorial discussion followed but no action was taken. Perhaps after the presidential elections and, hopefully not, after an economic slowdown the tax repatriation holiday might become a hot topic again.
It seems that Wall Street does not value cash abroad at face value, but instead discounts it by the full corporate income tax. The result is that AAPL is valued at a PE ratio around 11. Any indication of a tax holiday would give a quick boost to the companies mentioned in figure 1 as $2.1 trillion could be redistributed to shareholders via dividends and repurchases or used for acquisitions. Even if a tax holiday is not voted on soon, it always remains a nice buffer for the mentioned companies in case of a market downturn.