The tax law that went into effect this year imposed a one-time, reduced tax on profits held overseas by U.S. companies. The tax holiday was designed to encourage corporations to bring money home, to be made available for payments to shareholders and for investments that could boost domestic economic growth.
President Trump has made some eye-popping claims about the size of the repatriation bounty, saying in August that, “We expect to have in excess of $4 trillion brought back very shortly. Over $4 [trillion], but close to $5 trillion, will be brought back into our country. This is money that would never, ever be seen again by the workers and the people of our country.”
The Federal Reserve said earlier this month that companies were indeed picking up the pace of repatriations at the beginning of 2018, with roughly $300 billion in foreign profits being returned in the first three months of the year, a big jump compared to a baseline of about $35 billion per quarter in years past.
However, The Wall Street Journal’s Richard Rubin and Theo Francis reported Monday that the size of the repatriation could fall well short of the claims made by the tax law’s supporters. Surveying 108 large, publicly-held companies that account for the lion’s share of the profits currently held overseas, Rubin and Francis found that the firms had disclosed only about $143 billion in repatriations so far this year. While the Journal’s method of analysis, which relied on companies divulging private information, may have undercounted the money flowing back to the U.S., the report highlights “the frictions, the caution and the opacity” involved in the repatriation process, all of which could result in a far lower tally than many expect.
“In all, while repatriations have soared past pre-2018 levels, independent analysts don’t expect anywhere near the $4 trillion Mr. Trump has touted,” Rubin and Francis concluded.
The Journal piece provides some interesting details about repatriations :
- Estimates of the profits held overseas vary significantly. Putting aside the president’s possibly exaggerated claims, frequently-cited estimates peg the number at between $2.5 trillion and $3 trillion. But only half of that is in cash, reducing the size of the pool of profits that are likely to return home. (The Federal Reserve estimates that U.S. multinationals were holding about $1 trillion in cash overseas at the end of 2017.)
- About 100 companies account for 90 percent of the foreign profits held offshore.
- About two-thirds of the $143 billion in repatriated profits reported by the Journal came from just two companies, Cisco Systems and Gilead Sciences.
- There are still complications and uncertainties about the repatriations process, including dividend taxes overseas and state-level taxes in the U.S.
- Some large multinationals, including General Electric and Boston Scientific, say they don’t need additional cash for their U.S. operations have no plans to bring any foreign profits home.
- Some multinationals, such as Chevron and Archer Daniels Midland, have long used their foreign profits to invest in facilities overseas, and are unlikely to change that pattern even with the tax holiday.
- Many of the multinationals sitting on the biggest cash piles, including Apple, Microsoft and Google, have been vague about their plans.
- Much of the repatriated cash is being used for stock buybacks, and the Federal Reserve has detected few signs of an upswing in investment. “We’re going to be giving back to the shareholders through a healthy buyback,” said Cisco CFO Kelly Kramer said in February.
The bottom line: Total repatriated cash from the tax holiday on overseas profits could fall far short of the GOP talking points. At the same time, the tax is having a real effect and the dollar figures involved are quite significant. Daniel Clifton, an analyst with Strategas, an institutional research firm in Washington, said his firm expects to see about $700 billion repatriated this year, the equivalent of roughly 3.4 percent of GDP.