What repatriation tax changes could mean for U.S. companies

By Neil Amato

U.S. companies hold cash—lots and lots of cash—overseas to avoid paying the top corporate tax rate of 35% on those foreign earnings. But the rate could be heading down with a change in the federal government’s leadership, and the prospect of more repatriated earnings to work with has finance chiefs encouraged.

Those companies could do plenty with a heftier percentage of an estimated $2.5 trillion that is parked in other countries. And the gains could help to offset potential tariffs or taxes on goods produced overseas and sold to U.S. consumers, such as beer brewed in Mexico.

President Donald Trump’s tax proposal includes a repatriation holiday of sorts: Overseas earnings would be deemed repatriated and taxed one time, at 10%. So a company that has $20 billion in cash offshore would pay $2 billion, instead of $7 billion if it repatriated the earnings and paid the top corporate rate. The Trump proposal does not address future offshore earnings.

A plan proposed by Rep. Paul Ryan, the Republican speaker of the House of Representatives, would tax accumulated foreign earnings at a rate of 8.75% on cash and cash-equivalent profits and 3.5% on other profits, with the tax spread over eight years. Then the United States would move to a territorial system, with a 100% exemption from tax for dividends from foreign subsidiaries.

How does that look for a multinational company?

Take Pfizer. The pharmaceutical company would pay $23.6 billion in taxes on earnings it is holding overseas under the current system. “For us this is potentially a really big positive,” CFO Frank D’Amelio said at the J.P. Morgan Healthcare Conference on Jan. 10, according to a transcript of the event.

“We have $80 billion of permanently deferred earnings, and then we have a deferred tax liability on the books of $23.6 billion,” he said. D’Amelio didn’t specify the amount of earnings the $23.6 billion in deferred tax liability relates to, but he welcomes the opportunity to bring that money and the $80 billion in permanently deferred earnings back to the United States at a reduced tax rate.

“It gives us huge capital firepower as a corporation,” D’Amelio said. “… To return capital to shareholders, to do strategic business development, to invest in our business—it is a huge potential positive for us.”

David Meline, the CFO of biopharmaceutical company Amgen, said that the vast majority of his company’s $38 billion in cash at the end of the fiscal third quarter was offshore.

“We’ve chosen to leave that offshore in part because we felt that there would be a better opportunity in the future to repatriate that cash,” he said in December on a conference call with analysts from Citigroup.

Neil Amato (Neil.Amato@aicpa-cima.com) is a JofA senior editor.

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