Firms Keep Stockpiles of 'Foreign' Cash in U.S.
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., GOOG +5.50% software maker Microsoft Corp. MSFT +1.69% 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.
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 & JohnsonJNJ +0.22% and DuPont Co. DD -0.67%
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.
Edward Kleinbard, a professor at the University of Southern California's Gould School of Law and a former chief of staff for Congress's Joint Committee on Taxation, said there is a misperception that companies' excess cash is inaccessible, "somehow held in gold coins and guarded by Rumpelstiltskin."
"If it is a U.S.-dollar asset, that means ultimately it is in the U.S. economy in some fashion," he adds. "Where it is not is in the hands of the firm's 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.
U.S. companies are lobbying Congress to replace the current corporate-tax system with one that would tax only their domestic profits. Barring that, some say they would accept a tax on their repatriated earnings that is below the country's current corporate-tax rate of 35% so they could use the funds to pay dividends, buy back shares or otherwise put it to work in the U.S.
Out of EMC's $10.6 billion in cash holdings at the end of September, $5.1 billion was held overseas, according to its regulatory filings. Physically, however, more than 75% of these foreign earnings were stashed in the U.S. or in U.S. investments, according to a 2011 Senate report, whose figures the company confirmed.
"One of the major reasons that U.S. companies' foreign subsidiaries reinvest earnings in U.S.-dollar-denominated investments is to avoid gains and losses from changes in foreign-exchange rates," EMC spokeswoman Lesley Ogrodnick wrote in an emailed response to questions about the company's cash holdings.
EMC isn't alone. About 93% of the $58 billion in cash held by Microsoft's foreign subsidiaries is invested in U.S. government bonds, U.S. corporate bonds and U.S. mortgage-based securities, according to SEC filings. Most of that is in accounts in the U.S., according to a person familiar with the matter. In total, Microsoft had a cash stockpile of $66.6 billion, according to its filings.
The funds held by Microsoft's foreign subsidiaries are "deemed to be permanently reinvested in foreign jurisdictions," the company said in its filings. "We currently do not intend nor foresee a need to repatriate these funds."
Most of the $29.1 billion in cash and investments that Google said in an October securities filing that it plans to "permanently reinvest" outside the country is held in accounts or investments in the U.S. The same is true for most of the foreign earnings of software maker Oracle Corp., ORCL -0.69% according to the Senate report.
"If you are a U.S. company, you would have a bias to leave it in dollars, rather than taking the foreign-exchange exposure," said Fredric G. Reynolds, the former chief financial officer of CBS Corp. "No CFO wants to miss" an earnings estimate "because you happened to take a foreign-exchange hit," he said.
Sizable U.S.-dollar accounts are often owned by U.S. companies' foreign subsidiaries in tax havens like Ireland, the Cayman Islands and Singapore. But the accounts ultimately are U.S. accounts, regardless of where they are opened; a foreign bank typically will hold dollar deposits in a so-called correspondent bank in the U.S.
"The balances are in the U.S., but they are controlled from outside the U.S.," said Thomas Deas, vice president and treasurer of Philadelphia-based chemical producer FMC Corp. FMC -0.80% and chairman of the National Association of Corporate Treasurers.
Auditors and the SEC expect companies to account for a possible tax hit if there is any risk their subsidiaries might one day pay funds from foreign earnings to the U.S. parent. Few companies provide for that possibility, however.
Getting around it is simple: a company officer, typically the CFO or the treasurer, declares to the company's auditors that the funds have been permanently or indefinitely invested overseas. Auditors generally won't challenge the declaration, financial experts say, as long as a company's behavior is consistent and it doesn't repeatedly repatriate funds earmarked for foreign investments.
There is little reason not to formally commit funds overseas. Foreign markets offer the best growth prospects for many U.S. companies, and the funds may be needed there to build factories, develop new products or make acquisitions. Plus, the designation can be changed in an instant if the company is prepared to accept the tax bite. United Technologies Corp., UTX +0.69% 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.
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.
Even so, the repatriation issue has distorted companies' capital structures, said Alan Shepard, an analyst at Madison Investment Advisors, which manages about $16 billion in assets. In some cases companies could lower their debt if they repatriated their cash, but don't because of the tax consequences, he said. "And the money is effectively just across the street here in the U.S."
Oracle derives about half of its revenue from the U.S. but keeps more than three-quarters of its cash and short-term investments—or $26 billion—in the hands of its foreign subsidiaries.
During its 2012 fiscal year, the company said it "increased the number of foreign subsidiaries in countries with lower statutory rates than the rate used in the United States, the earnings of which we consider to be indefinitely reinvested outside the United States."
If those funds were brought home and subject to U.S. income tax, Oracle estimated it could owe about $6.3 billion at the end of its fiscal year in May.
Low interest rates at home have allowed U.S. companies to borrow cheaply, helping them avoid tapping their foreign-held cash. Late last year Oracle raised $5 billion in its first debt sale in two years. It is paying an interest rate roughly two-thirds of a percentage point above Treasurys for the 10-year bonds, about 2.5% at the time. The company said the proceeds could be used to buy back stock, repay debt or pay for acquisitions.
A version of this article appeared January 23, 2013, on page A1 in the U.S. edition of The Wall Street Journal, with the headline: Firms Keep Stockpiles Of 'Foreign'Cash in U.S..