Like all arguments involving money and politics, the debate over American companies’ foreign-held cash and how it should be taxed – or not – when brought back to the U.S. quickly gets overheated and oversimplified.
Tuesday’s Congressional hearings, at which Apple Inc. (AAPL) chief executive Tim Cook is due to testify, will no doubt prove this.
Cook will argue, as leaders of big technology companies frequently do, that high official U.S. tax rates on foreign-sourced profits reduce the amount companies invest domestically in hiring and manufacturing.
Members of Sen. Carl Levin’s (D-Mich.) Permanent Subcommittee on Investigations are poised to pepper Cook with accusations that multinationals use accounting schemes to channel the maximum possible amount of profit through low-tax offshore jurisdictions as a massive tax-avoidance effort. (A 40-page memo released by the Subcommittee ahead of the testimony said as much.)
A reality in the middle
The reality, no surprise, is probably somewhere in the middle, as suggested in this CNBC segment in which I participated on Monday afternoon.
Yes, the U.S. stated tax rate of 35% on foreign profits is among the highest in the world and creates some incentive for companies to store cash overseas, as Apple is doing with some $100 billion of its $140 billion in cash. This creates potential inefficiencies and, at least on paper, cuts into the ready cash companies might otherwise use to expand their business here.
Yet, in reality, U.S. companies’ effective tax rate is running closer to 20%. The U.S. allows companies to deduct or gain a credit for any taxes paid to foreign governments, though the process can be cumbersome. It’s hard to build a very strong argument against broad corporate tax simplification, given the size and inherent inefficiency of the commercial tax-optimization industry.
More to the point, though, the degree to which overseas-held cash is restraining corporate investment, or cash payouts to shareholders, is probably overstated. Companies are loath to invest in U.S. workers or factories for many reasons – slow demand, regulatory demands or labor costs – having nothing to do with taxes. When companies were allowed in 2004 to pull cash home, the observable impact on hiring and investment was negligible.
And companies seem to talk about foreign cash – which often has piled up there by circuitous bookkeeping exertions – as being more inaccessible than it is. Dell Inc. (DELL), for instance, told investors its overseas cash was untouchable – until management decided to bid to take the company private, which will require use of that cash.
Further, most every company that holds a trove of cash overseas can borrow cheaply and tax-efficiently if it sees a compelling use for the money and wishes not to pay the repatriation taxes on it. Apple is, effectively, doing exactly that, this month issuing $17 billion in debt at slim interest rates, rather than pulling some of its non-U.S. cash to execute a planned stock buyback and higher dividend. By some estimates, this maneuver will save $9 billion in taxes.
Everyone can hope, in good faith, for a less complex tax code that motivates less convoluted, uneconomic paper shuffling.
Yet until we hear reliable reports of a big-company CEO telling his or her board that it must shelve a promising domestic investment project that would have earned an excellent return over the next decade – all because of the tax expense of using foreign-held cash – then it’s wise to throw some cold water on those overheated comments about the economic importance of U.S. taxation policies.