The United States has one of the highest tax rates in the world for corporations. In the past, the U.S. Government might have thought that this was a great source of income for the government, yet the risk of unintended consequences has taken place.
Companies that have earnings in other countries have decided to leave those earnings there in order to avoid the U.S. taxation, creating what is called untaxed foreign earnings. If the money is brought back to the United States, it becomes taxable at 35%. Over one third of the income is a pretty big chunk of money to be removed from the corporate coffers.
So what are the unintended consequences? Companies that are forced to leave their profits overseas due to the oppressive taxation, can’t use that money to hire more Americans, can’t use it to improve machinery and plants, and can’t use it to pay out higher dividends which could benefit income investors and pension plans. It also can’t be used to buy out smaller companies. Basically, it prevents money from flooding the US economy.
The current administration has proposed a 10% tax on repatriated funds, which would be a huge benefit to many corporations, primarily in the areas of technology and health care.
So there may be a play in some of the stocks that are holding huge amounts of money in other countries. For example, Apple (AAPL) holds more money outside the U.S. than any other publicly traded company, somewhere around $200 billion (give or take $25 billion; when you’re talking about that much money, who’s counting).
Other companies with a lot of funds held overseas include:
Alphabet [Google] (GOOG)
Cisco (CSCO)
General Electric (GE)
IBM (IBM)
Intel (INTC)
Microsoft (MSFT)
Oracle (ORCL)
Pfizer (PFE)
It may be a while before the untaxed foreign earnings tax break takes place, but when it does, the benefits to the companies should be swift.
Disclosure: Author owns AAPL and MSFT
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