By Vipal Monga
U.S.-based multinationals booked a ticket home last year for an
estimated $300 billion in foreign profits--the most in nearly a
decade--chipping away at an enormous offshore cash pile that has
drawn scrutiny from regulators and lawmakers.
Dozens of companies in the S&P 500 index, including eBay
Inc., VeriSign Inc. and Stryker Corp., set aside those profits to
buy back stock, pay for capital improvements, such as factories and
equipment, and even to fund daily operations.
In dollar terms, earnings repatriated or earmarked for
repatriation by American companies in 2014 rose 7% from the
previous year, according to a report from Credit Suisse Group AG.
That was the most aggressive they have been since 2005, when they
brought home $359 billion after Congress declared a "tax holiday,"
allowing them to skirt the statutory U.S. corporate-tax rate of
35%.
The impetus for the latest uptick isn't so clear. "It's still a
mystery, " said Anthony Carfang, a partner at Treasury Strategies
Inc., a Chicago-based consulting firm. "There may be ways to use
the money in the U.S. that's going to get companies a higher rate
of return."
Even so, U.S. companies are still sitting on a record $2.1
trillion in foreign earnings, including about $690 billion in
cash.
Some companies remain reluctant to move their money. The strong
U.S. dollar eats into profits made in foreign currencies. And there
are louder cries in Washington for a tax overhaul this year,
encouraging some companies to wait and see what happens.
There's little apparent reason "for companies to bring the money
back right now," said Mr. Carfang.
American companies pay taxes on their foreign profits in the
countries where those profits are earned. But they don't have to
pay Uncle Sam as long as the money is "indefinitely reinvested"
abroad.
A company might, for example, use the funds to expand its local
sales force or to buy a rival.
But, if a company brings money back to the U.S., or lays plans
to do so, it owes the Internal Revenue Service the difference
between the foreign taxes paid on the sum and the U.S. tax rate,
which is almost always higher. And it must book the tax on its
accounting statements. Most companies try to find ways to offset
the additional taxes with credits.
Although Credit Suisse's analysis was limited to the S&P
500, companies outside the index also tapped their foreign earnings
last year.
Footwear manufacturer Crocs Inc. reclassified $165 million of
its foreign earnings as eligible for repatriation in 2013. It
recorded $11.7 million in taxes, but waited another year to bring
the money home. Crocs used a combination of tax breaks from
charitable donations and credits tied to unused stock compensation
to shrink its tax payment to the IRS, said Chief Financial Officer
Jeff Lasher. "We were trying to keep the cash taxed at zero," said
Mr. Lasher. Crocs used the money to buy back shares and finance its
U.S. operations.
Buybacks have become a popular use for foreign earnings.
Internet marketplace eBay set aside $9 billion last year to bring
back to the U.S., a sum it said it could use to fund buybacks or
acquisitions in coming months. The company booked $3 billion in
U.S. taxes on the transaction.
Internet registry operator VeriSign repatriated $741 million
last year and used at least part of it to take $867.1 million of
its shares off the market. The company offset the taxes with a
credit it earned when it liquidated a subsidiary the previous
year.
Others are using the cash to pay down debt. Teleflex Inc., a
medical-devices company, repatriated $237.1 million last year to
repay $235 million it had borrowed from a bank credit line.
Concern about the cost of a tax audit or penalty could be
motivating some U.S. companies to bring money home. Credit Suisse's
analysts said that companies might be finding it harder to make the
case that their foreign earnings are indefinitely invested,
especially the large sums simply sitting in cash accounts.
The Public Company Accounting Oversight Board, the government's
audit watchdog, warned recently that it would pay close attention
to the way auditors treated such earnings. The Treasury Department,
meanwhile, has made it harder for a U.S. company to buy a foreign
one with the goal of relocating its headquarters to a lower-tax
country.
Last month, President Barack Obama proposed letting companies
bring back the profits they hold at overseas subsidiaries at a tax
rate of 14%, and then proposed taxing foreign earnings going
forward at a minimum of 19%.
Amid the annual congressional wrangling over tax policy,
companies have found some creative ways to reduce the tax impact of
repatriation.
Stryker, which makes medical devices, said last year that it
earmarked $2 billion for return to the U.S. The company incurred
tax bills in Europe when it moved some of its intellectual property
to the Netherlands from other European countries and realized that
those taxes would help reduce its U.S. tax bill on the money to
roughly 5%.
"We will use the funds to drive growth in our existing
businesses through investments in acquisitions, dividends and share
repurchases, in that order," said CFO Bill Jellison.
Joseph Walker and John Kester contributed to this article.
Access Investor Kit for Credit Suisse Group AG
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=CH0012138530
Access Investor Kit for Credit Suisse Group AG
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US2254011081
Access Investor Kit for Crocs, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US2270461096
Access Investor Kit for eBay, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US2786421030
Access Investor Kit for Stryker Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US8636671013