Everybody knows by now that President Obama will retain his residence in the White House. The fiscal cliff is weighing heavily on many investors' minds. Tax increases may be coming for your dividends and capital gains. Many companies have huge hoards of cash hiding overseas.
- Microsoft (MSFT): Mr. Softee has around $54 billion sitting offshore. Microsoft has apparently, according to CNN Money, also shaved $7 billion from its tax bill by keeping their cash abroad.
- Apple (AAPL) has $81 billion stashed overseas. Apple has increased its overseas cash holdings 52% since 2011. Earnings abroad were taxed at a rate of only 1.9%, as well.
- Google (GOOG) is sitting on $43 billion outside the United States.
- A report put out by Moody's in July stated that "22 US-based technology companies had $289 billion, 70 percent of their total cash, overseas at the end of March and forecast this would grow to $400 billion within three years."
Other significant overseas cash hoarders:
According to Bloomberg, General Electric (GE) has $102 billion overseas. Pfizer (PFE) is also holding $63 billion. There are numerous global corporations keeping their cash away from the clutches of Uncle Sam. Bloomberg also noted that there is an estimated $1.6 trillion in corporate cash sitting overseas overall, which also includes cash in assets such as factories.
What does it mean?:
All of this excessive cash isn't being taxed, but isn't being returned to shareholders either. It seems to be trapped cash that if unlocked, could help replenish a depleting economy if invested back into the U.S.; while also jolting shareholder value significantly in the process if returned to said shareholders. Apple's CFO Peter Oppenheimer explained the company's current feelings, saying:
repatriating the cash from offshore would result in significant tax consequences under current US law.
Continuing on by stating:
We have expressed our views with Congress and the administration. We think that the current tax laws provide a considerable economic disincentive to US companies that might otherwise repatriate the substantial amount of foreign cash that they have.
Andrew Williams, a spokesman for General Electric, also commented on the situation to bloomberg, opining:
We believe fundamental tax reform would increase domestic investment, create high-quality jobs and encourage U.S. multinationals to reinvest more overseas earnings in the U.S... We support a broader tax base, lower statutory corporate tax rate and adoption of a territorial tax system even if it means higher taxes for companies like GE.
Even if General Electric decides to play ball after reforms, will others follow suit? What would it take for companies to bring back their cash?
Corporate Tax rates:
The United States now has the highest corporate tax rate in the world. It obviously causes corporations to avoid bringing profits and cash from overseas back to the U.S. It is also an issue that both parties seem to agree on. President Obama openly stated that:
When it comes to our tax code, Governor Romney and I both agree that our corporate tax rate is too high, so I want to lower it, particularly for manufacturing, taking it down to 25 percent.
Now the question is whether or not Mr. Obama will follow through. Obama has proposed to lower the rate to 28 percent already in February, while also recommending the closing of many loopholes and deductions to complement the tax drop. Either way, there is obviously a great need for the corporate tax rate to be lowered, as an incentive for corporations to repatriate their massive cash hoards to the U.S. so that they can return it to shareholders and reinvest in the American economy.
Even if Obama lowers the rate to 28 percent, however, he will also be banning deductions and closing loopholes that save companies billions. He will also be competing with countries such as Ireland, who as noted in the graph above, will still have lower tax rates.
If the President can somehow manage to actually implement his plan, and somehow successfully lure cash back from overseas, investors should get their shopping list ready for foreign cash loaded companies, because an explosion in shareholder value may occur. This may also help soothe the pain if we are all dropped off the fiscal cliff. Until (and if) corporate tax reform happens, it would be wise to look into how much of a company's cash is inaccessible overseas, because all of that cash on the balance sheet may be nice to look at and great for the long-term, but at the same time temporarily out of reach.