Word of The Day – Trapped Cash

Trapped Cash – Cash that can’t escape corporate pockets and come home

Definition: Overseas earnings of corporations that are taxable on return to the US

Discussion: American multinational investment banks and other corporations who do business overseas make trillions of dollars abroad, and of course, they pay no taxes on it.

Currently these companies are “going native”. They no longer send American executives on long plane trips. In the age of the Internet, decisions can be made instantly. That means having people familiar with a foreign country working in that country advising the company on it’s decisions and helping facilitate things it wants to happen overseas.

As a result of corporate expansion overseas rather than at home, cash is being kept abroad so that it can be used there. American multinationals are now engaging in “cross-border transactions.” They are looking to make all-cash buyouts and mergers with or takeovers of foreign companies. Observers of the surge in international deals by American multinationals are worried that, as a result of trapped cash, “tax issues are distorting business decisions”. (Source: “Tax fears prompt M&A rush” Financial Times 5/16/11 p 15)

If they need money to use at home, American multinational corporations can simply borrow money cheaply by issuing bonds. Given the recession, they don’t need to obtain more money from abroad right now. However, these corporations are still asking for a “tax holiday” on any overseas earnings they bring them home. The proposed tax would be only 5.25%, roughly the same amount as it costs them to issue bonds. (Source: “US tax holiday proposed for overseas corporate profits” Financial Times 5/18/11 p4)

Those opposed argue that giving corporations a  tax break on foreign earnings would not increase American jobs. They fear that that jobs would continue to be shifted overseas while money shipped home would be spent on share buyback sand higher dividends paid on the remaining shares. That is what happened during the last tax holiday in 2004. One could argue though, that shareholders would eventually pay a tax at ordinary income tax rates (of at least 15 %) on most of the increase in dividends, thus helping to diminish the US debt at some point in time.

Copyright © 2011 Nancy K. Humphreys