While uncertainty remains about future tax reforms and one-off tax discounts, corporations are being advised to wait before repatriating cash from overseas.

The news that two of Americas largest cash-rich companies – Microsoft and Apple – sold $27 billion of debt recently to fund their daily operations, repay maturing debt, and buy back shares, has got financial experts once again discussing potential tax reforms and President Trump´s pre-election pledge to offer a one-off tax discount to corporations repatriating cash from overseas.

The consensus of opinion is that whatever the future holds, corporations should refrain from bringing cash into the United States for the present, and follow the example of Apple and Microsoft – especially while borrowing rates remain close to their historic low of the last few years. This article explains the reasoning behind the consensus of opinion.

The Current U.S. Worldwide Tax System

Under the current arrangements for corporations with overseas operations, profits repatriated into the United States are subject to 35% tax, less a credit for any taxes paid in the overseas jurisdiction. For a corporation that returns a $100 million profit in an overseas jurisdiction with a 15% tax rate, this would mean a tax liability of $20 million if the funds were repatriated into the United States.

The current U.S. worldwide tax system is a disincentive for corporations to repatriate their profits if they are not required. The tax liability far exceeds the borrowing rate, which explains why Microsoft – with more than $100 billion on overseas cash assets – had to raise finance to complete the $26.2 billion acquisition of LinkedIn, and why Apple – with nearly twice as much hoarded overseas – borrowed $6.5 billion on 2015 to pay a dividend to company shareholders.

Would a Territorial Tax System be Any Better?

One of the options being discussed among a series of proposed tax reforms is a Territorial Tax System. This system would tax corporations on their domestic income only (as happens throughout much of the rest of the world), allowing corporations to repatriate cash from their overseas operations without having a tax liability other than in the jurisdiction in which the profit was made.

This proposal would seem to resolve Microsoft´s and Apple´s domestic cash issues, but it would be of no benefit to the Treasury – particularly if corporations removed money to low-tax jurisdictions to avoid paying the domestic rate of corporation tax. It appears that the only way a Territorial Tax System would work is if tax rates were significantly reduced to match those of overseas jurisdictions. Another loss to the Treasury.

Discounts Didn´t Work Before – Why Should They Now?

Among his pre-election pledges, President Trump was in favor of giving corporations a “one-time” tax discount on the cash they repatriated into the country. His plans included a 10% tax rate, followed by an end to the deferral of taxes on corporate income earned abroad. The tax revenues raised would help fund many other pre-election pledges and help create thousands of jobs.

Those with long memories may recall that, in 2004, the Bush administration passed the American Jobs Creation Act – an Act that permitted U.S. corporations to repatriate cash from overseas for a “one-off” discounted tax rate of 5.25%. The motive behind the Act was to “spur increased domestic investment”. In 2011, the U.S. Senate Permanent Subcommittee on Investigations reported there was no evidence of increased investment and that the money had gone into share buybacks, higher executive salaries and increased dividends.