America’s $2 trillion

That is a lot of money stashed away abroad

Most readers may be surprised to know that the US-based companies have kept cash profits to the tune of $2 trillion abroad. That is roughly equivalent to the GDP of India and roughly half the market capitalization of the UK stock market. Close to 9% of this stash belongs to Apple. In fact Apple has a cash chest of $200 billion of which $180 billion is held abroad. If you are wondering about the reasons for the same, it is all about taxes.

Here is how it works…

For companies in the intangible space like software, research and financial services it is very easy to stash money abroad. For example a pharma research company has to only register a particular patent in, say, Ireland. From that point, all profits generated by that patent will attract the much lower Irish tax rates. A similar logic applies to software and financial services companies. That is why this $2 trillion stash is dominated by companies from the pharma, IT and financial services space like Apple, Oracle, GS, Citi etc.

It is all about US tax rates…

The biggest reason for this huge cash stash abroad is the extremely punishing US tax rate. At 35%, it is among the highest in the developed world. But there is also an anomaly. A global company like Google can show its profits as arising out of Ireland. It therefore only pays the concessional Irish tax. The day Google decides to repatriate these profits back to the US, it will get a credit for the Irish tax paid but will have to pay 35% US tax on the profits repatriated back to the US. This is what is discouraging many large US companies from repatriating their profits back to the US.

Why is the US not acting?

Barack Obama has expressed his concern over this huge stash abroad. It is a form of tax arbitrage that US companies are enjoying, which probably makes them appear a lot more valuable than they actually are.

It is not that Obama has not proposed to impose a tax on this cash stash. For example, Obama had proposed a flat tax of 14% on cash held abroad and a 19% tax going forward. The resultant $270 billion was to be used for improving infrastructure in the US. However, strong corporate lobbies and Republicans ensured that the proposed tax did not happen.

It can be tapped any time

While companies like GE claim that this stash is for global acquisitions, it is all about taxes. If the US government offers a one-time concession, a very large chunk of this money will come back into the US. But that will first call for a re-haul of the US Tax Code. ©

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