The enduring mystery of U.S. #offshore cash secure.globeadvisor.com/servlet/Articl… – Fascinating explains why cash rich companies borrow to pay dividends
— U.S. Citizen Abroad (@USCitizenAbroad) May 9, 2013
This is a fascinating article. It explains why companies keep a higher percentage of their cash outside the United States and why they are likely to continue to do so. The U.S. is “cash strapped” and printing money. Yet, it won’t allow its corporations to bring its money back to invest in the U.S. How can this not be bad policy?
First, let me explain the tax part. In Canada, corporations can receive dividends tax-free from their overseas subsidiaries when the profits come from active businesses. (There are, as there always seem to be in tax law, certain exceptions.) The idea is that the income has already been taxed in its country of origin, says Gabe Hayos, the vice-president of tax for Chartered Professional Accountants of Canada.
The U.S. Internal Revenue Service lumps in the foreign dividend with corporate income. While the U.S. offers a credit for foreign taxes paid, U.S. multinationals typically face an extra tax bill when the foreign earnings come home for a number of reasons, including the higher U.S. corporate income tax rates.
For the most part, it’s a tax bill U.S. companies are unwilling to pay. Rather than “repatriate” those earnings, U.S. companies have been “permanently reinvesting” them in the country they were earned, avoiding those extra U.S. taxes.
Companies have done this year after year. As a result, their foreign cash balances have grown way out of proportion to their international businesses.
Those who are not twitter literate will find the article here.
This is a long-festering sore and is similar in many ways to the US insisting that income earned abroad by American individuals should also be taxed by the US (never mind that it has already been taxed in the resident country). The real gripe is that while there’s a big move by some in Congress to change the rules for corporations (so they can repatriate that money to the US and invest it), there’s no appetite at all to do the same for individuals.
Interesting that this guy doesn’t think they should change those rules and adopt the Canadian approach. I would guess that all those countries in which those multi-nationals are invested would also be happy if the US stayed the course — that way they continue to see the money invested in their jurisdiction.
It’s not in US interests for that cash to ever come back. It’s essentially the side effect of the system that has been created.
The Fed has been printing money and tossing it all at corporations who then suck it off overseas and stash it away. If it’s converted into another currency, then the central bank in said country will end up having to buy it up to issue local currency. This extra pile of cash then has to be dumped somewhere…typically into US bonds because, well, it’s gotta go somewhere plain and simple.
Alternatively, it is kept in an account at a private bank that neither invests it nor pays interest. In such a case, it sits there as USD and just grows.
The impact of “onshoring” is interesting. In either case, a massive influx of hot money into the US is going to create massive inflation. Trillions and trillions of dollars have to end up going somewhere. Getting pumped into an economy that is barely living will be devastating.
If the cash is not sitting in USD, then onshoring is impacting both economies severely.
Phase 1) The USD is already gone. The resident nation must purchase USD to allow for conversion, following which, there is a massive influx of local currency in the system, which jacks up local inflation
Phase 2) As the demand for USD is increased, you see deflation of the USD, which is devastating for all industry and must be countered by more printing to meet the demand.
Phase 3) Deflation now complete, the USD is in the US system again, you’re now see inflation hit the US on a massive scale. The only appropriate counter is decreasing the money supply via massive amounts of bond issuance that sends rates to nothing… with rates already at nothing, the cash simply won’t go there, meaning taxation is the only real counter. This is honestly, politically impossible in the US, as any rules targeting the problem-makers will also target, by default, everyone else, and destroy the little bit of life the US economy still has remaining. In light of this taxation, the funds will be diverted offshore, defeating the entire point of the exercise.
As the system exists now, the US is able to print USD at will, and watch it fly off overseas where it does not touch the US economy in any real way. This is exporting inflation pure and simple and it’s the only thing that has kept the US alive for the last few decades, it shifted from a nice “perk“ to absolutely critical for the survival of the US system.
This may be posted elsewhere.
How is this related? The corporate side of things.
The United States, Australia and the United Kingdom set up a tax sharing plan to catch corporate tax evaders. The move could spread to other countries.
Europe eases CORPORATE tax dodge. Individual burdens rise.
@Calgary411 …. “… means individuals rather than businesses are often bearing the brunt of higher taxes …”
Do individuals not always end up bearing all taxation? Corporations are merely vehicles for the purpose of earning the income …. in general terms if they are highly taxed then their selling prices rise to enable them to make a reasonable return on their activity and capital employed +/- risk and other premiums and discounts. If they are not taxed and their earnings end up as dividends to their shareholders then those individuals will pay the tax on their share of the income. If the earnings are reinvested then there will be other tax benefits on the expenditure of that money on advertising, retooling, factory building etc and from the employment of people. Corporations are not essentially tax payers … they are merely intermediaries. More tax rates = More inflation and Less productive Activity …. Lower Tax rates and bureaucracy = more productive activity and thus More Tax Revenue Collected.
I pray that FATCA will be repealed and quickly !
I pray that there will be a more sensible tax regime created – never forgetting the maxim to Keep It Simple.