For months, many investors and market-watchers pressed Apple Inc. to return more of its cash pile – nearly $150-billion (U.S.) – to its shareholders. Apple finally agreed. So last week, it borrowed $17-billion in the largest corporate-bond offering in history.
Does that make any sense? It does if you’ve been following the long-running debate over how the United States taxes the foreign earnings of its multinational corporations.
And even if you have, you might be surprised at how much of the cash on these corporations’ balance sheets is overseas, unavailable for dividends and share buybacks. In part, that’s because many companies won’t tell you.
First, let me explain the tax part. In Canada, corporations can receive dividends tax-free from their overseas subsidiaries when the profits come from active businesses. (There are, as there always seem to be in tax law, certain exceptions.) The idea is that the income has already been taxed in its country of origin, says Gabe Hayos, the vice-president of tax for Chartered Professional Accountants of Canada.
The U.S. Internal Revenue Service lumps in the foreign dividend with corporate income. While the U.S. offers a credit for foreign taxes paid, U.S. multinationals typically face an extra tax bill when the foreign earnings come home for a number of reasons, including the higher U.S. corporate income tax rates.
For the most part, it’s a tax bill U.S. companies are unwilling to pay. Rather than “repatriate” those earnings, U.S. companies have been “permanently reinvesting” them in the country they were earned, avoiding those extra U.S. taxes.
Companies have done this year after year. As a result, their foreign cash balances have grown way out of proportion to their international businesses.
Microsoft Corp., another cash-rich tech company feeling the pressure to boost its dividend, does about half of its business in the United States. But almost 90 per cent of the $74.5-billion in cash on its balance sheet is held outside the country.
Retailer Staples Inc., which gets two-thirds of its sales from the U.S., has nearly half of its $1.33-billion in cash outside the country.
Apple, at least, has a foreign-cash issue in line with its sales, two-thirds of which occur outside the U.S.; roughly 70 per cent of its $144.7-billion in cash at March 31 is outside the country.
So when Apple says it intends to give $100-billion back to shareholders by the end of 2015, it’s all well and good. It’s got just $45-billion in the U.S., however, and that’s what leads to a cash-rich company borrowing more cash, just to give it away.
Now, this could turn into a tax policy discussion. Many will happily point out that the fastest way to fix this problem would be to give these companies a tax holiday, or at least reduced rates, on these foreign earnings. I happen to disagree, in part because I don’t think the U.S. corporate tax system is nearly as unfair as its opponents claim.
But that’s a discussion for another day. Instead, I’d like to point out a much easier problem to solve: Getting companies to accurately disclose the foreign cash holdings.
There’s a whole host of companies for whom the previous analyses would be impossible, because they won’t reveal the numbers even when much or most of their cash is held outside the U.S.
The most comical example of this, perhaps, is Hewlett-Packard Co., which acknowledges “substantially all” of its cash is held outside the United States.
This qualifies as improved disclosure for HP, which became penpals with the staff of the Securities and Exchange Commission in 2011 about whether it was satisfactory to say that a “substantial amount” of its cash was overseas. HP apparently chose “substantially all” in lieu of another descriptor offered by the SEC, “a significant large majority.” (Reporter Kate Linebaugh of The Wall Street Journal, who has written a series of stories on this issue, first detailed the discussion.)
As part of the dialogue, the SEC staff said it believed HP should disclose some actual numbers about the cash held outside the U.S. It “would illustrate that some investments are not presently available to fund domestic operations such as the payment of dividends, corporate expenditures or acquisitions without paying a significant amount of taxes upon their repatriation.”
Bravo. Alas, HP was willing to disclose the amounts of cash directly to the SEC staff, but requested “confidential treatment” of the numbers. Which it received from a compliant SEC staff. So it’s still a secret to investors.
It shouldn’t be. The amount of cash held overseas should become a standard part of U.S. financial disclosure. That way, investors can easily find out if the company they’re pressing for a return of cash actually has any of that cash to give.