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The Repatriation Game

The Repatriation Game - Apple, Repatriation, Tax, Economic Stimulus

Arguably the biggest question from investors this year for tech giant Apple had nothing to do with any of its must-have products. A January announcement indicated that the iPhone-maker would be bringing a quarter of a trillion dollars in offshore money back to the United States. Shareholders and media alike wondered how CEO Tim Cook planned to spend it.

A 2017 study found that, like Apple, more than 70 percent of the Fortune 500 had established subsidiaries in international tax havens. Among U.S. multinational companies, the exceptions are the ones that don’t have piles of foreign profits sitting in obscure locales such as Vanuatu and the Isle of Man. The reason: Companies have been able to defer the tax liability on those earnings until the companies returned the profits to the U.S.

Not surprisingly, Corporate America has drawn heat for this widespread practice. When Republicans passed their long-awaited tax cuts late last year, the legislative package included measures aimed at getting back a sizable chunk of the trillions of dollars estimated to be parked in offshore corporate accounts. That process of bringing the money back stateside is commonly known as repatriation, and Congress’ nonpartisan Joint Committee on Taxation has estimated that the repatriation tax regime laid out in the bill will put about $339 billion into the federal government’s coffers in the next 10 years.

Earlier this month, companies got a better idea of how the repatriation program would work. The U.S. Treasury Department published proposed regulations that would cut the tax rate for repatriating foreign profits down from 35 percent down to a one-time rate of 15.5 percent on cash and cash equivalents. Illiquid assets would be taxed at a rate of 8 percent. Additionally, companies would be able to pay the resulting tax bills in installments over eight years.

The repatriation regulations are expected to be finalized in 2019. Yet, even before Treasury published its proposed guidance in August, initial returns indicated that foreign profits were starting to flow back into the U.S. The Bureau of Economic Analysis reported that companies had repatriated $305.6 billion in the first quarter of 2018, up from roughly $35 billion during the same period in 2017. (That works out to an annual rate of $1.2 trillion, shy of the president’s lofty estimate of $4 trillion but a nice chunk of change nonetheless.)

Why try to lure foreign profits back? In addition to the tax revenue, proponents have touted repatriation as a form of economic stimulus. The thinking goes that companies will use the repatriated money for capital expenditures and new hiring. Economists at the Congressional Research Service cast doubt on that claim in an analysis that studied the effects of the last federal tax holiday on repatriated earnings. They found that the measure, which was enacted as part of the 2004 tax bill, produced “a significant increase in repatriated earnings, [but] empirical evidence is unable to show a corresponding increase in domestic investment or employment.”

Instead, the CRS economists determined that companies used the majority of the repatriated money to fund share buybacks and dividend hikes. If the plans Apple announced in May–which include a $100 billion share buyback–are any indication, expect more of the same from this round of repatriation.

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