The normal business cycle of a company operating across borders – such as Internet companies like Google, Apple, and Facebook – involves offering goods or services for a profit, paying taxes, and reinvesting the money.
Many Internet companies based in the USA are earning billions in revenues in other jurisdictions. For them to reinvest it in the USA, they need to repatriate the money – on which they need to pay tax.
The US government has a major interest in seeing the repatriation of funds back to the USA but repatriation tax encourages companies to keep their profits offshore for longer. A recent change in tax rules in the USA has opened the doors for multinationals to pay a lower repatriation tax, enabling them to bring the profits back home sooner, and reinvest them in the USA.
Although the first three months of the year were slower than expected, the Bank of America foresees a large portion of offshore cash being repatriated during the year.
Why is the new tax law attractive for multinationals?
It is estimated that between $2.6 trillion and $3.1 trillion in corporate profits have been stockpiling in foreign accounts, waiting for a tax break. Apple’s overseas cash alone amounted to $252.3 billion – a sum that the company was disinclined to repatriate immediately due to the high taxes it would pay upon its return home.
The new US tax law allows US companies to repatriate cash at reduced rates for a limited time. As a part of the tax reform, repatriation tax rates are as low as 8%, compared to the 35% companies traditionally paid to repatriate that money.
The revisions include scrapping the previous international system for corporations which allowed companies to defer their income taxes until they brought the income back home. It is this deferral provision that allowed companies to stockpile so much cash abroad.
The new law focuses on domestic economic activity and provides for a two-tiered levy: cash will be taxed at 15.5%, while less liquid assets will be taxed at 8%. The new rule allows companies to pay over a period of eight years.
What do the new rules mean for multinationals’ future plans?
In reaction, some of the USA’s biggest companies, including Apple, immediately started making provisions in their books. Apple, which has the largest overseas cash pile of any US company, reported it would pay $38 billion as a one-time tax payment to repatriate its cash holdings. The number accounts for 15.5% of the $252.3 billion Apple holds in overseas cash.
Apple plans capital expenditures of $30 billion in the USA over five years that will potentially create 20,000 new jobs, and open a new campus. It also plans to spend $10 billion on data centres in the USA. It will leave only a small portion for international investments.
Quite likely, other companies – including Internet companies – will follow suit.
Robert Aquilina is Diplo's Finance Manager.