The Real Per Share Effect of a Corporate Tax Holiday

Includes: CSCO, MSFT
by: Efficient Alpha
It seems the favorite political hot button; a corporate tax holiday is back in vogue this week, as Bloomberg, The Wall Street Journal, and a myriad of other sites and papers run their oft-partisan stories. The Wall Street Journal reports that Sen. Charles Schumer (D.,N.Y.), a frequent critic of the proposal, would be willing to consider a tax-repatriation holiday given the stipulation that companies use proceeds to stimulate jobs. Bloomberg, in an uncharacteristically biased article, tells of Cisco’s (NASDAQ:CSCO) efforts to avoid U.S. taxes by booking profits in tax-favorable jurisdictions.
Effects of a tax-repatriation holiday on the labor market, the economy and the general utopia in which we live depends greatly on source. Comparisons are generally made to the 2004 tax holiday that exempted 85 percent of qualifying dividends received from foreign profits. The scope of this article is not to argue the merits or costs of a new tax holiday, but to analyze the per share effects of repatriation on five of the largest corporations with cash overseas.
Information from the Internal Revenue Service shows U.S. corporations had income subject to U.S. taxes in the amount of approximately $834 billion in 2007, resulting in a tax liability of $292.3 billion. Foreign tax credits in the amount of $86.5 billion were claimed resulting in a net liability of $192.8 after additional business credits claimed. In effect, of the 33.5 percent tax liability owed, corporations paid 10.4 percent to foreign governments and 23.1 percent to our red, white, and blue. This 23.1 percent rate will be used below, as the rate of repatriation without a holiday.
If we follow Section 965 of the Internal Revenue Code, which established the rules for the 2004 holiday, then firms will exempt 85 percent of foreign incomes and pay the normal rate of 35 percent, less foreign credits, on the remaining. The effective rate here comes to 4.7 percent [.15*.35*.896 = .04704]. This assumption will be used as the rate given a repatriation tax holiday.
Forbes’ estimates for cash held overseas by five U.S. tech companies as of March 2011 are shown in the table below, including shares outstanding as reported by each company in their last quarterly statement. The table also shows how much cash per share would be available after repatriation given the two scenarios. While the difference is significant, it is hard to believe that this is what has spurred so much vitriol among different groups. What is clear from the table (if total cash available is calculated) is that there is a considerable amount available to be repatriated regardless of tax treatment. Cisco, with an estimated $38.8 billion overseas, would have from $5.42-$6.72 peCash Held Overseas by Five Major Tech Firmsr share available. This represents between 35.8 and 44.4 percent of Tuesday's closing price. Microsoft (NASDAQ:MSFT) would have between 14.8 and 18.4 percent of the most recent closing price available. These five companies alone hold more than $121 billion in cash if they repatriate without a tax holiday and $150 billion if they repatriate it on favorable terms.
Politicians and pundits will make of this what they will, but investors should look closely at the figures in the table when analyzing prospective investments. A tax holiday may or may not be in the cards, but if rates rise this cash must be put to productive use and most likely much of it will be repatriated.

Disclosure: I am long CSCO.