Monday, March 11, 2013

Thoughts On Unrepatriated Earnings -- Permanently-Foreign, Or Not?

Take a look at the graphic at right, (mostly) courtesy of The Wall Street Journal. I added Apple to the graphic, just for a sense of scale (larger than GE by worldwide revenue; but 7th or 8th on non-repatriated foreign earnings, in the WSJ rankings, however) -- just in case any of you have been following the recently-concluded Greenlight Capital tempest in a teapot, involving Cupertino.

Okay -- back to the main topic: What leaps out at you from even a quick glance at the graphic/list? "Ding!"

That's right -- three of the top five (and four of the top six) off-shore hoards are held by companies from a single industry. No other industry has more than two in the top ten. In fact, in the top 60 companies covered by the Journal's analysis -- between the health care, and technology industries -- three-quarters of all the unrepatriated earnings reside, despite being less than half (by number) of the top 60.

Here is a bit from The Wall Street Journal's story, (subscription $$$), overnight, do go read it all:
. . . .A Wall Street Journal analysis of 60 big U.S. companies found that, together, they parked a total of $166 billion offshore last year. . . . The 60 companies were chosen for the analysis because each of them had held at least $5 billion offshore in 2011. . . .
Within the group of 60 companies, the Journal found 10 that parked more earnings offshore last year than they generated for their bottom lines. They include Abbott Laboratories, whose store of untaxed overseas earnings rose by $8.1 billion, to $40 billion. The increase exceeded the pharmaceutical maker's net income of $6 billion, which was weighed down by a $1.4 billion charge related to early repayment of debt. Including that charge, Abbott reported a pretax loss on its U.S. operations. . . .
This topic is more nuanced, and complicated that the Journal might suggest, however, because truly "permanent" investments made outside the US cannot simply be returned to the US (think of a sprawling regional R&D campus, for example). Moreover, does it even make sense for the US to attempt to tax truly permanent off-shore assets? On that notion, I am an agnostic.

And so, the idea that Merck or Pfizer or J&J should simply pay US corporate income tax on all non-US retained earnings is not entirely obvious. By way of contrast, where a company is holding primarily cash or very liquid assets,  offshore -- as Apple presently does -- differing policy considerations may apply. Now, a skeptic might argue that not much of the Merck/Pfizer offshore hoard is cash, or liquid assets any longer, because each brought home more than $15 billion in 2005 -- in fact, Pfizer brought home nearly $40 billion that year, via a tax holiday. And so, the US saw no US taxes paid on that money, in any event.

At least in the "permanent hard assets abroad" category, however (the largest bulk of Merck, Pfizer and J&J remaining offshore holdings), I might rephrase the question to ask whether US shareholders of US companies should also be investing (by way of paying local, in-country corporate taxes) in the economies of other nations. I would argue they should. I would argue that it is good for the US shareholders' economic interests -- and that it is not a pure tax dodge, by the US companies, here in the US -- even if it smells a little bit like one.

We will keep an eye on this, as essentially entire industry-groups -- of multi-national pharma concerns (and computers, electronics, oil, and telecoms) face this complex web of balancing foreign and US earnings and tax liabilities. I may have more to say about it if I find the time -- later this afternoon.

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