— 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.