How Companies Would Gain From a U.S. Tax Amnesty on Repatriated Funds

Includes: AAPL, INTC, MSFT
by: David Klein
This topic generates passions on both sides of the aisle. Those for a tax amnesty on repatriated funds argue it will generate billions in additional corporate tax revenue, fund pension plans, raise wages, create jobs, invest in new plants and equipment, and benefit shareholders. Those against argue there was no evidence that the 2004 repatriation legislation increased U.S. investment or jobs.

Currently, there is over $1 trillion earned by American businesses, which has been taxed once, sitting overseas.

Regardless of which side of the argument one sides with there is no doubt about the potential benefits to both the company and shareholders.

Some companies we have written about that would benefit from a tax amnesty are:
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According to recent SEC filings the combined amount of cash and investments held by foreign subsidiaries for Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) exceeded $90 billion as of the quarter ending June 30. This amount could exceed $100 billion by the end of the next quarter.

There is bipartisan support building for a repatriation holiday in some form. Given the state of the economy we feel there is a good chance a tax amnesty, or a reduced tax rate, is a possibility; benefiting the companies mentioned in this article.
What are the possible benefits for both shareholders and the companies?

Dividends and stock buy backs: Companies would be free to return money to shareholders vs. raising debt, as Microsoft has, to fund dividends and buybacks. The Boards’ may also find it easier to raise dividends or pay a special dividend with the added flexibility the funds would provide. Who knows maybe Apple would return cash to shareholders.

John Chambers, CEO of Cisco (CSCO) said he'd repatriate the whole $30 billion, which could then be used to pay a bigger dividend, buy back more stock, make U.S. acquisitions and hire more staff in the U.S.

U.S. acquisitions: Acquisition of US companies vs. foreign companies would level the playing field, potentially making US acquisitions more attractive. Buying a foreign company, as Microsoft did with Skype, avoids the tax consequences. If Skype was a US firm the added cost to Microsoft would have exceeded a billion dollars with repatriated cash.

Oracle (ORCL) used 2004 repatriated funds to outbid foreign competitors to acquire two U.S. companies – one in California, the other in Minnesota. The stock price has doubled since then.

Capital Investments: Paul Otellini (Intel CEO) told this to an Aspen gathering of the Technology Policy Institute:

How do we get companies to expand in America rather than overseas? Adjust the U.S. corporate tax rate to a rate that is competitive world-wide. At Intel, we generate 75% of our revenue and much of our profit abroad. The U.S. tax treatment of that income makes it extremely expensive to repatriate that profit and invest here. If our tax rate approached the rest of the world, corporations would have a natural incentive to invest here given many of the natural advantages that exist in this country….. Take factories. I can tell you definitively that it costs $1 billion more per factory for me to build, equip, and operate a semiconductor manufacturing facility in the United States. The rub: Ninety percent of that additional cost of a $4 billion factory is not labor but the cost to comply with taxes and regulations that other nations don't impose.

Duke Energy (NYSE:DUK) brought back over $500 million in 2004 repatriated funds, which was directed towards wages, investments in capital projects, and expansion of its infrastructure and transmission/distribution networks. Duke’s stock price has increased from about $10/share to about $18/share today, in part due to the benefits provided from repatriated funds.

Debt: How can repatriated profits to retire debt and address under-funded pension plans not be a good thing? Enough said.

As I noted above, support is building for some kind of repatriation holiday. Regardless of which side of the fence you sit on, the bottom line is the benefit to both shareholders and the companies holding excess cash overseas are undeniable. The only unanswered question is if there will be any restrictions placed on repatriated cash.

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Additional Source: Barrons

Disclosure: I am long MSFT, INTC.