Corporate Cash Overseas: Why is it there, and will it be returning to the States anytime soon?

With more than one trillion dollars in corporate cash and short-term investment being held overseas, it’s no wonder that off-shore accounting has been a hot topic as of late. Many corporations find themselves wondering if this practice is worth looking into, and what the legalities are. In this post we will explore the reasoning behind stockpiling corporate cash overseas, its legal foundation, and its outlook.

Why is there so much corporate cash overseas?

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In theory, all American corporations are taxed at 35% on their global income, so what’s the appeal of maintaining corporate cash overseas? Because any income that is earned by an active controlled foreign corporation will not typically be taxed until the cash is repatriated to the U.S. based parent company, numerous organizations have made the decision to stockpile large sums of corporate cash in foreign accounts. With these sums of money in fiscal limbo, many corporations are holding out hope that tax laws will be reformed, or that a one day repatriation holiday will occur, allowing them to bring their corporate cash stateside for a significantly lower tax penalty.

Is it legal to keep corporate cash overseas?

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For years, the notion of stockpiling corporate cash overseas has remained as a bit of a “”gray area”” for successful corporations, accountants, and financial advisors. The fact is that multinational organizations are able to use transfer pricing (the pricing of gods and/or services that are sold between the affiliates of a parent company) as a means of lowering global tax rates. Intellectual property can be transferred to low-tax jurisdictions like Ireland, Puerto Rico, or Singapore, enabling corporations control licensing and cost-sharing agreements and avoid or decrease U.S imposed taxes. The cash from global operations is then held offshore until the company is given the opportunity to bring it back home, tax-free or with a reduced penalty.

From an accounting standpoint, this practice is legal, as long as certain exceptions are made. Generally, it is presumed that all earnings of a foreign subsidiary will, at some point, be distributed to the U.S.-based parent company, thereby guaranteeing a future 35% tax on the repatriated income. This creates a deferred tax liability on the corporation’s consolidated balance sheet. If, however, the parent company can prove to its accountant that it does not actually need the foreign fundingand that it will be either indefinitely or permanently reinvested overseas, a tax liability can effectively, and legally, be avoided.

What is the outlook for overseas stockpiling?

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In hopes of bringing this funding stateside, the concept of stockpiling corporate cash overseas has been the subject of debate. As recently as July, President Obama spoke out on corporate tax reform. Although a repatriation holiday wasn’t specifically discussed, many interpreted his mention of “one time revenues” being tied-in with a transition into a new business tax as an indication that congress may be leaning toward it.

Still, only time can tell what will come of this current trend toward preserving and re-investing corporate cash overseas. In 2004, the U.S. actually did reduce repatriation taxation to approximately 5% in an effort to promote domestic investment. Many have argued, however, that this promise was not fulfilled and has done little to help the economy.

As such, most are clamoring for more drastic economic reform. A territorial tax system with an improved system for monitoring transfer pricing could be in the works, but the idea of a worldwide consolidation system without tax deferral and lowered corporate tax rates is the ideal. Regardless of your feelings on corporate cash overseas, this is a topic to watch and discuss with your financial advisors.

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