Tax Repatriation: How the USA can get $310 billion in unplanned tax revenues

Tax Repatriation: How the USA can get $310 billion in unplanned tax revenues

See the Wall Streets Journal's website for the full report at  https://www.wsj.com/graphics/tax-repatriation/?mod=e2tw

TAXING FOREIGN PROFITS

How the Tax Law Will Affect U.S. Firms Bringing Overseas Money Home

Companies have long sheltered foreign profits offshore. Now the tax bill is coming due. How much will they pay?

By Theo Francis and Yaryna Serkez

Published Jan. 16, 2018 at 5:30 a.m. ET

December’s federal tax overhaul gave American companies much of what they wanted on the tax front. For many multinational firms, it came with a price tag.

They must pay a one-time “repatriation” tax on an estimated $2.5 trillion or more of foreign profits accumulated over the past three decades. The U.S. government estimates it will collect $339 billion from the tax over the next decade.

A Wall Street Journal analysis suggests that 311 large publicly traded companies could generate nearly $250 billion of that. But the levy will affect different industries and companies very differently. Here’s how.

For years companies sequestered foreign profits overseas, paying foreign taxes on them and U.S. tax only once cash came to U.S. shores. Some companies accumulated tens of billions of dollars in such profits. An analysis by Zion Research Groupputs the total for the full S&P 500 at about $2.8 trillion.

Those foreign profits are disproportionately generated by technologycompanies, at about 38% of the total, and health care companies, at 23%.

Less profitable and heavily domestic industries account for much less, such as about 8% for industrial firms, according to Zion Research.

Just a handful of the biggest companies are responsible for a disproportionate share of the accumulated foreign profits.

Unremitted Foreign Profits

Caterpillar
Foreign profits: $16.0 billion 
Tax estimate: $1.4 billion

Tax estimate

The taxes companies pay on these profits will vary somewhat, depending on both the size of the profits and how they have been invested. Companies must pay 15.5% on liquid assets, such as cash and a variety of marketable securities, and 8% on other assets.

At networking giant Cisco Systems, for example, cash and cash equivalents held by foreign subsidiaries represented 95% of its $71.1 billion in accumulated foreign profit in 2017. By contrast, retailer Wal-Mart Stores reported that it held $5.9 billion in foreign cash, about 22% of its $26.6 billion in accumulated foreign profits.

Cash and Cash-Equivalent Assets

Other

Cash and equivalents

$80

$10

$0 billion

$70

$60

$50

$30

$20

$40

Cisco Systems

Wal-Mart Stores

As companies begin disclosing the actual financial impact of this tax in coming weeks – often in conjunction with fourth-quarter earnings reports – some firms with similar accumulated foreign profits will likely incur very different tax bills.

The figures shown here are estimates. Companies will get some credit for foreign taxes paid on the amounts, and will be allowed to offset foreign profits with some foreign losses. Figures from public financial statements, used here, are likely to differ from those used for tax purposes, which aren’t generally disclosed. (For more detail, see the methodology.)

For example, Kimberly-Clark, the consumer-products giant that makes Huggies diapers, reported $8.9 billion in accumulated foreign profit at the end of its most recent fiscal year, about the same as mutual-fund giant Franklin Resources’s $9 billion. But cash-rich Franklin Resources is likely to pay a higher tax bill than Kimberly-Clark, which has more non-financial assets.

Zion Research’s analysis found that just five companies could wind up paying a third of the tax. “Literally a handful of companies are responsible for large chunks of the earnings and the cash overseas,” founder David Zion said.

Estimated Repatriation Tax

It remains to be seen what companies will do with their foreign cash once they are able to use it in the U.S. without additional tax. Policymakers hope they will invest it in the U.S. to expand production and create jobs. Economists and many investors expect bigger dividends and stock buybacks – Mr. Zion estimates that, after paying the one-time tax, companies in the S&P 500 could repurchase 4.1% of their combined market capitalization.

Companies generally declined to comment on their expected obligations under the tax on their accumulated foreign profit, saying they planned to disclose figures with or before fourth-quarter financial results.