Corporate cash piles

by
Money

Kate Linebaugh’s story in Wednesday’s Wall Street Journal pointed out an interesting aspect of corporate tax laws. Many of those piles of “foreign” cash on companies’ balance sheets are actually invested in the U.S.

Here’s her story:

There’s a funny thing about the estimated $1.7 trillion that American companies say they have indefinitely invested overseas: A lot of it is actually sitting right here at home.

Some companies, including Internet giant Google Inc., software maker Microsoft Corp. and data-storage specialist EMC Corp., 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.

In accounting terms, the location of the funds may be just a technicality. But for people on both sides of the contentious debate over corporate-tax reform, the situation highlights what they see as the absurdity of rules that encourage companies to engage in semantic games, legal gymnastics and inefficient corporate-financing methods to shield profits from U.S. taxes.

The cash piling up at the nation’s biggest corporations will get renewed attention in the weeks ahead, as companies report their fourth quarter and 2012 earnings. Tuesday’s reports included updates from Google, which saw its stockpile of cash increase to $48.1 billion from $44.6 billion a year earlier, as well as results from Johnson & Johnson  and DuPont Co.

The fact that much of the money already is in the U.S. also undermines a central argument made by companies seeking tax relief to bring home money they have earned abroad, tax experts and lawmakers say: That the cash is languishing overseas when it could be invested to the benefit of the U.S. economy.

This is an interesting piece of reporting and one that could have far-reaching implications for corporations as Congress takes up the tax code. It seems that many corporations’ argument for lower taxes to bring money home won’t actually change the underlying economy.

NPR’s Marketplace interviewed Linebaugh about her story. Here’s the report:

“It’s a technicality, this is just sort of how global banking works,” says Linebaugh. “Companies have been expanding overseas and a lot of their income is earned from developing markets around the world or from Europe and it is just being kept in U.S. securities or bank accounts or U.S. government bonds because they are very safe.”

Linebaugh says this situation lays bare how the current tax situation isn’t serving anyone.

“The U.S. Treasury is not getting the revenue they expect to be getting from corporate earnings and corporations are not able to use those funds in the ways that they want,” says Linebaugh.

As Linebaugh points out, the current situation isn’t helping anyone – the government nor corporations nor shareholders:

The U.S. is the only major economy whose tax authorities claim a share of a domestic company’s profits no matter where those profits are earned. But auditors don’t require the companies to account for possible taxes on foreign earnings as long as they declare that the funds are permanently invested overseas. The upshot: American companies have a strong incentive to find ways of earning most of their profit overseas and keeping it in the hands of foreign units.

Recently the Securities and Exchange Commission has pressed companies to disclose how much tax they would owe if those funds were transferred to the U.S. parent. The idea is to give shareholders a better picture of how much cash would be available if the funds were repatriated.

Linebaugh goes on to write about what a potential overhaul of the tax code might look like:

Companies say the U.S. corporate tax rate is so high that it doesn’t make financial sense to bring more cash back than necessary. Even if much of the money already is here and available to be lent out by U.S. banks, companies argue that it isn’t available to them to use as they please, such as distributing it to shareholders through dividends and buybacks.

Many executives still hold out hope for a broad overhaul of the corporate tax code. If lawmakers do take up the matter, figuring out how to collect taxes on earnings accumulated outside of the U.S. is expected to be front and center. The challenge would be in devising a system that raises revenue by setting the 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.

The Senate’s Permanent Subcommittee on Investigations looked into the issue in 2011 and concluded a temporary tax break on foreign earnings wasn’t warranted. “The presence of those funds in the U.S. undermines the argument that undistributed accumulated foreign earnings are ‘trapped’ abroad,” the committee said in its report.

No matter what which side of the debate you’re on, the timing of this piece is excellent and could help shape the Congressional debate. Linebaugh and her editors should be commended for getting the piece out and helping start the conversation.