So we all know what to expect. . .
Firms spent 94 cents of every dollar from 2004 tax holiday on share buybacks and dividends: study
By: Jonathan D. Rockoff
Dec. 16, 2017 8:00 a.m. ET
Republican lawmakers say their tax overhaul would spur companies to hire more employees and build factories in the U.S. Yet one key provision, which could free up hundreds of billions of dollars for companies to spend, probably would benefit shareholders, analysts say.
The provision changes the tax rules on the profits that U.S.-based companies make overseas. Under current law, companies must pay a 35% tax on the earnings if they bring them to the U.S., though they can get credit for overseas taxes. To avoid the bill, companies have left $1.9 trillion abroad, according to Moody’s Investors Service.
The GOP plan would eliminate the tax on ex-U.S. profits going forward, while requiring companies pay a levy on earnings currently offshore at a much-reduced rate.
Tax experts predict companies would bring to the U.S. much of their overseas cash if the rate is cut.
Based on analyses of past programs to repatriate overseas corporate earnings, Wall Street analysts and tax experts expect companies would use the money for purposes such as buying back shares and mergers. Instead of adding jobs, they say, companies might cut them if they use their cash to buy rivals and then take out costs.
“There will be increased share repurchases, but limited impact on building new plants, real investment activity and employment,” said Dhammika Dharmapala, a University of Chicago law professor who has studied what U.S. companies have done with repatriated cash.
Mr. Dharmapala co-authored a working paper for the National Bureau of Economic Research that found that after companies brought back cash during a tax holiday in 2004, they spent 79 cents of every dollar on share repurchases and 15 cents on dividends.
There was no evidence of an increase in domestic investment, according to the working paper.
“Shareholders will get the cash” from repatriation, said Kimberly Clausing, a Reed College economics professor and an expert in international tax policy.
Executives at U.S.-based companies have complained for years that the country’s tax code makes it hard for them to compete with foreign rivals whose overseas earnings aren’t taxed by their home countries and who in some instances pay lower tax rates on their domestic profits.
Many U.S. companies have moved overseas to take advantage of lower tax rates, and others have taken steps, like shifting intellectual property overseas, to lower their U.S. bills. Companies also have kept earnings overseas to avoid paying U.S. taxes on it.
Some tax experts say the overhaul would give companies more flexibility to access their money, while helping reduce any advantage foreign rivals get from taxes and deter the tactics that U.S.-based multinational companies have used to cut their taxes.
“More of the income of the world-wide group will be taxed in the U.S. than previously,” said Robert Willens, a Columbia Business School professor who runs his own tax-and-accounting services firm.
Tax experts say U.S. companies would be more willing to invest at home if the corporate rate is cut, as proposed, by 14 percentage points to 21%. “The lower the rate, the more attractive it is to do business here,” said Mitch Cohen, who leads EY’s global life-sciences tax practice.
But Mr. Cohen said companies may still be reluctant to, for example, build a plant in the U.S. if they are unsure that the tax changes will last long-term. And many factors beyond taxes go into such decisions.
Technology and drug companies have the biggest cash piles overseas because they do considerable business outside of the U.S. Apple Inc. leads all U.S. based companies with what analysts estimates is $252 billion in cash overseas.
“We expect technology issuers will use repatriated off shore cash largely for shareholder returns,” Fitch Ratings said in a recent research note.
Credit Suisse analyst Vamil Divan said he expects the drug companies he follows to use repatriated cash for share buybacks and acquisitions. “I think we’re going to see the consolidation in the industry we’ve been waiting for,” Dr. Divan said.
Analysts predict Pfizer Inc., would use repatriated money to do a big deal. The company has about $22 billion in cash overseas, and Chief Financial Officer Frank D’Amelio has said its priorities for using any money brought to the U.S. following tax changes “are dividends, share buybacks, investing in the business and M&A.”
In the three years after the 2004 tax holiday, companies increased their spending on mergers and acquisitions by 47%, on buybacks by 37% and on paying down debt by 13%, according to a Credit Suisse HOLT analysis of how the 50 companies with the most earnings overseas at the time changed their spending.
The companies increased their spending on capital expenditures by 10% and on research and development by 7%, the analysis found.