A colleague who is an top international tax expert says regularly that non-tax people should never write about tax. That dim view is no surprise given ho regularly and casually the financial media regularly parrots obvious false claims made by business lobbyists about tax policy.
We’ve written regularly how the press and public have been snookered into believing the bogus idea that clever tax structuring by tech and Big Pharma companies that result in them having large profits booked in offshore entities for tax purposes is tantamount to having cash overseas. The idea is ridiculous. Apple, who has been the biggest exploiter of this device, holds its cash in New York banks and runs it out of an internal hedge fund in Nevada. The fact that an offshore legal entity, most often Irish, is where profits are booked for tax purposes has squat to do with where money sits and how it can be deployed. The practical result of profits being held offshore is they are not included in the reported profits of the US public company.
For example, from an April post, debunking the Financial Times’ Gillian Tett going off the rails on this topic:
Massive Tett Error #1. Corporate cash for companies like Apple is not offshore. Tett:
President Barack Obama proposed raising an additional $238bn in tax by imposing a one-off levy of 14 per cent on repatriated cash piles if they were used for infrastructure spending… What the American economy needs is not on-off populist measures to ban tax inversions or repatriate overseas cash piles….the dismal status quo: a world of ever-growing offshore cash piles
This is nonsense and means that the basic premise of the article is 100% off base.
Corporate profits are booked in offshore entities. Tax books are not the same as accounting books or movement of cash. As top tax expert Lee Sheppard wrote in Tax Notes in 2013 (no online source):
But for reporting companies subject to generally accepted accounting principles and U.S. worldwide taxation, let’s stop talking about ‘‘offshore’’ earnings and ‘‘bringing the money home.’’ The earnings are merely booked offshore. The earnings are by and large not banked offshore. To the extent that the much-ballyhooed $2 trillion of deferred foreign earnings is classified as permanently reinvested in cash, most of that cash is sitting in U.S. banks, where it is propping up their capital.
Apple, for instance, runs its “offshore” profits as an internal hedge fund out of Nevada.
Massive Tett Error #2: Allowing companies to repatriate profits will lead to more investment and spending. Tett:
So investors would do well to note that cash repatriation is a topic on which Mr Trump has also been articulate — and unusually precise. Notably, under his tax plan American companies would pay a one-off discounted rate of 10 per cent if they “bring their cash home and put it to work in America”. Some of his advisers privately say this rate could be cut further — to, say, 5 per cent — if there was clear evidence of the cash being used to create jobs.
Again, we have the misrepresentation about “cash” being overseas. But corporate claim that they would invest more in the US if they were allowed to book those offshore profits in the US is demonstrably false. Why? The US gave companies a repatriation holiday in 2004, after a bout of the very sort of whinging they are engaging in now. And what did they do? They increased dividends and executive pay.
And from a Wolf Richter post earlier this month, on Moody’s dishing out corporate propaganda:
Some falsehoods simply refuse to die. No matter how many times they get stabbed in the heart, and no matter who stabs them, they rise again in their full glory.
The falsehood that a vast amount of US corporate cash, including much of Apple’s $250 billion, is “locked away overseas” is one of them. We’ve known since May 2013 from the Senate subcommittee investigation and hearings into Apple’s tax-dodge practices that a big part of corporate “overseas cash” is actually invested in the US…
On the forefront are our Tech Titans, which have on their books “almost half” of all cash “held by US non-financial companies. These are the top five “cash holders”:
- Google parent Alphabet
And this is what Moody’s has to say about Apple’s wondrous cash hoard, much of it overseas:
Based on Apple’s reported results for its fiscal year that ended in September, Moody’s projects the company’s cash will exceed $250 billion by the end of calendar 2016, representing over 14% of total non-financial corporate cash.
And then it dives straight into tax lobbying, in behalf of its clients, directed straight at Congress:
“Without tax reform that reduces the negative financial consequences of repatriating money to the US, we expect offshore cash levels to continue increasing,” said Richard Lane, a Senior Vice President at Moody’s.
The financial media jumped on the bandwagon and quoted this falsehood for mass consumption in order to pressure Congress to give our multinational corporate heroes another opportunity to dodge taxes, on top of the countless opportunities already written into the tax code for them that small businesses don’t have access to.
But here’s the thing. In May 2013, Apple got into a pickle because it had decided to fund its stock-buy-back and dividend program by taking on a record $17 billion in debt rather than “repatriating” part of its “offshore” cash and paying income taxes on it.
The Senate subcommittee investigation and hearings, chaired by Senator John McCain, showed that Apple had sheltered at least $74 billion from US income taxes between 2009 and 2012 by using a “complex web” of offshore mailbox companies. The investigation found untaxed “offshore” profits of $102 billion held by Irish subsidiaries – which Apple refused to “repatriate” in order to keep that income from being taxed in the US.
But according to the Senate report, Apple doesn’t have to repatriate that moolah because it’s already in the US. The Irish mailbox subsidiaries, on whose books this money is for tax purposes, transferred it to Apple’s bank accounts in New York. The money is managed by an Apple subsidiary in Reno, Nevada, and is invested in all kinds of assets in the US. Apple’s accountants in Austin, Texas, keep the books,
Money doesn’t stop at borders. Tax accounting does.
Last week, the Wall Street Journal added a new layer of misrepresentation to the tax lobbyists’ pitch. Because cash will move to the US (false), the dollar will go up. Um, even if Apple et al. were parking funds in a bank in Ireland, moving money across borders does not have a currency impact. The only way it would would be if Apple were holding the funds in foreign currencies and converted them to dollars. But most major multinationals, and Apple is clearly one of them, have their Treasury departments operate as profit centers, meaning they take currency bets. So even if the underlying phony claim (tax law change = money moves to US) were true, there’s not reason that would lead them to rearrange their trading/hedging bets.
Part of $2.5 trillion in profits held overseas by companies such as Apple Inc. and Microsoft Corp. could be heading back to the U.S., a move analysts say could further fuel the U.S. dollar’s powerful rally.
U.S. corporations have been holding billions in earnings and cash abroad to avoid paying a 35% tax that would be levied whenever the money is brought home.
The article goes off the rails with remarkable speed, in the second sentence. Holding “earnings” abroad for tax purposes is not “holding cash abroad”. Help me.
And even better, foreign exchange experts, supposed pros, are either so dumb that they haven’t bothered to understand the issue or so clever that they are stoking the misunderstanding so as to trade the other side. But the remarks below are from a “strategist” who is supposed to look smart in public, as opposed to a trader, who has every incentive to headfake his competitors. So the ignorance is pervasive:
Now, some say the prospect of companies repatriating perhaps hundreds of billions of dollars could offer more impetus to the U.S. currency’s rally.
“However small, however big this flow of money will be, it will be positive for the case of dollar strength,” said Daragh Maher, head of U.S. foreign-exchange strategy for HSBC Holdings. “There will most likely be an inflow into dollars.”
But following Soros’ reflexivity principle, if market professionals trade based on this pervasive misunderstanding, the dollar will appreciate. Or as Buffett frames it, in the short term, markets are a beauty contest and the myth of cash flowing out of Ireland into US dollars is a very pretty fable.