Much of MNEs' "Offshore" (and hence untaxed) Cash Hoards Held Onshore

by Linda Beale

Much of MNEs' "offshore" (and hence untaxed) cash hoards held onshore

The Wall Street Journal, in its editorial pages a great friend to big business and low taxes for same, had a decent front-page article  on the corporate hoard of cash designated as "permanently invested offshore".  In fact, much of that cash is sitting in U.S.-dollar-denominated assets in the good ole USA.  Nonetheless companies are permitted under the tax rules to claim that those profits are earned overseas and kept there.  See  Kate Limbaugh, Firms keep stockpiles of cash in U.S., Wall St. J. (Jan 22, 2013).

Some companies, including Internet giant Google Inc., GOOG +5.74%software maker Microsoft Corp. MSFT +1.36%and data-storage specialist EMC Corp.,EMC +1.03%keep more than three-quarters of the cash owned by their foreign subsidiaries at U.S. banks, held in U.S. dollars or parked in U.S. government and corporate securities, according to people familiar with the companies' cash positions.

In the eyes of the law, the Internal Revenue Service and company executives, however, this money is overseas. As long as it doesn't flow back to the U.S. parent company, the U.S. doesn't tax it. And as long as it sits in U.S. bank accounts or in U.S. Treasurys, it is safer than if it were plowed into potentially risky foreign investments.

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Of course, the designation can be changed in an instant if the company is prepared to accept the tax bite.  United Technologies Corp., for instance, used $4 billion of such "permanently" reinvested funds held by foreign subsidiaries to help pay for last year's acquisition of Goodrich Corp. Id.

That last quoted paragraph is a giveaway.  Thse foreign subsidiaires are controlled by the US MNE and have no real say in the ultimate use of the cash.  When the MNE wants it for something, it can get it in an instant.  As my colleague Calvin Johnson at University of Texas has noted, this "reinvorces the idea that a foreign sub is just a ledger entry, with no significance"  (email statement quoted with permission).

Meantime, these US-based MNEs are busy lobbying Congress to give them even more tax breaks.   They want a so-called territorial system or the ability to bring home their hoarded cash at low (or effectively negative) tax rates.   MNEs are married to the idea of pushing for paying nothing for the many ways the US economy has boosted their profits through tax expenditures and nothing for the many other ways in which the US system has increased their profits--both at home and abroad.

Remember that their owners already get an extraordinarily preferential rate of tax on dividends paid out to them (treated as net capital gains, recently made permanent in one of the sillier giveaways of the "deal" between Dems and Republicans on whether or not to let the Bush tax cuts expire as the Republicans originally wrote the bill) and on capital gains when they sell the shares.  The very low effective corporate tax rate--not infrequently a negative rate because of the way the rules and time value of money works--means that wealthy shareholders are still getting very much a free ride to accumulated wealth through the US tax system.  It's time that stopped.

The Journal article's suggestion--that the Congress needs to "set[] the [corporate income tax] rate low enough that companies opt to pay the tax rather than continue to pile up an estimated $300 billion a year beyond Uncle Sam's reach."  Id.  That suggestion must be tongue in cheek--no matter how much the rate is lowered on the wealthy corporations making incredibly high profits, they still insist that they don't want to pay any tax.  They will not be happy unless the rate is zero or negative.  That is the reason that Oracle "derives about half of its revenue from the US but keeps more than three-quarters of its cash and short-term investments--or $26 billion-in the hands of its foreign subsidiaries" and has established a bunch of new foreign subsidiaries in tax havens for holding these profits.  Id.

From my perspective, Congress should not lower the rate.  It should instead stop many of the loopholes that permit companies to claim to "sell" essential IT property to offshore affiliates in order to then claim profits offshore.  And it ought to deal with similar gambits to lower US taxes, such as disallowing completely any interest deductions for debt to the extent that the company holds "offshore" funds of its controlled foreign subsidiaires in US-dollar-denominated assets in the United States --i.e., no interest deduction for debt of the US MNE consolidated group that is matched by a US-dollar denominated, US asset held by a controlled foreign subsidiary.

Professor Johnson recommends a "global consolidated return" for multinationals, with international negotiations to determine each country's taxing jurisdiction on that whole.

These and similar ideas should be considered by a Congress truly intent on reasonable reform, economic justice, and distributional justice.

ataxingmatter





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