U.S. companies with operations overseas have historically kept a stockpile of wealth abroad. By some estimates as much as $3.1 trillion in foreign profits are sheltered outside our shores. This is largely because the U.S. has historically maintained a punishing tax policy for corporate profits earned overseas.
That changed at the end of 2017. Congress passed the Tax Cuts and Jobs Act of 2017 and ushered in a new era in the world of corporate profits. For the first time in a while, now is a good time to bring those dollars home.
What is the history on foreign profits and repatriation tax?
Prior to the new legislation, companies large and small with operations abroad were forced to pay a particularly steep price on income earned overseas. Not only did those entities have to pay taxes based on the country where they were earned, they also had to pay the 35% U.S. corporate tax.
But the law left a loophole: Companies only had to pay that 35% tax rate when they brought their money back to the U.S. So, many companies decided to keep their money where it was, which meant said funds weren’t funneling back into the U.S. economy. Therefore, these funds couldn’t be used to grow business in the U.S., hire more workers, or return profits to shareholders.
How has the U.S. altered it strategy on taxing foreign profits in response to this crisis?
As we all know, broken tax policy rarely gets fixed. But in this case, it appears the U.S. government has seen the drawbacks related to heavy-handed taxing of foreign profits. Not only did the Tax Cuts and Jobs Act of 2017 slash the 35% corporate income tax rate to a more competitive 21% – it eliminated the tax on foreign profits brought into the United States.
To be clear, it wasn’t a clean break. This new tax structure imposed a one-time tax on all accumulated overseas assets of 15.5% on cash and 8% on other assets — payable over the course of eight years. But as you can see, the new legislation effectively removed the incentive to keep that money abroad.
What has been the impact of the new repatriation tax legislation?
During the first quarter of 2018, U.S. companies had repatriated around $300 billion, according to a Federal Reserve study. Per Bloomberg, the 2nd quarter followed with an equally impressive $160+ billion in repatriated foreign profits. Some estimates put those number even higher. These totals represent a dramatic increase in the amount of repatriated cash, compared to years past. The quarter that comes closest to this total was in 2005, when companies brought home about $150 billion. In 2017, the last year before this change, companies repatriated about $50 million per quarter.
This dramatic increase in repatriated funds should result in a significant increase in free cash flow for U.S. companies who’ve been sheltering their foreign profits abroad.
Now the question remains: What will companies do with that money once it’s back in the U.S.?
How will your company put these newly repatriated funds to use?
Many companies have chosen to put that money directly toward share repurchases. This boosts stock prices and overall market value in the short term, but it does little to impact the economy going forward. The federal government would like a significant portion to go toward investments that create jobs and boost our economy.
Most of these decisions will be made at the individual company level, but that leaves us with another very important question.
How can your company protect these newly repatriated funds and generate a great return while the investment decisions are being made?
When you bring your money back home, you need a strategy to keep it safe while allowing it to earn a competitive return – that part is obvious. At ADM, our Deposit Management services provide just that with minimal effort on your part.
We can secure your company’s funds with virtually unlimited FDIC insurance in a single deposit – and a single statement. In addition to easily securing your funds, we leverage our network, consisting of hundreds of different banks, to maximize the return on your secure investment.
The burning question: Why Repatriate Now?
If you’re waiting to determine the best use for your funds before you repatriate, you may be leaving money on the table. You should consider a robust deposit management program that takes the stress of cash management off your team, protects your funds, and earns a competitive return.
At ADM, we believe that enlisting our robust deposit management program can provide you with more time to focus on identifying the best use for your funds, therefore creating the best possible outcome for your business. Planning to repatriate your foreign profits? Let us help you protect that money. Visit our Deposit Management page for more details, or talk with one of our friendly associates today.