Wall Street Journal Puts Foot in Mouth and Chews Via False Claim That Tax Law Change Would Lead US Companies To Move Cash to US

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”:

  • Apple
  • Microsoft
  • Google parent Alphabet
  • Cisco
  • Oracle

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.

But here is the nonsense from the Journal:

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.

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  1. Kirk Hartley

    This is a good start. But, please do some specific, simplistic articles that can be used to help the uneducated understand how they get screwed by the .00001%. For example, blow up the double taxation myth as to corporate profits in the increasing number of situations where it is a myth. For example, corporate profits paid out to Charlie the CEO through stock price increases (via buybacks) and options are subject only to preferred tax rates and/or vastly delayed tax events. Similarly, there is little or no double taxation when profits flow through to private equity folks who pay little or no taxes, or pay years later. Please do some simple examples as explainers and then do some follow ups that highlight examples from the real world. And please update on Mitt’s infamous IRA. http://www.theatlantic.com/politics/archive/2012/09/whats-really-going-on-with-mitt-romneys-102-million-ira/261500/

  2. pictboy3

    So as a layperson when it comes to financial matters, I have a question. If we did try to tax money actually held in the US, through whatever creative justification you like, wouldn’t that just force the money out of US banks? Or are there other intangibles that keep the US as the preferred destination, even if we pierced the veil of the shell companies used for tax dodging?

    1. Skip Intro

      I think the US would need to tax foreign companies, like the Irish company that charges Apple a huge amount for intellectual property, so that US -based Apple makes very little profit, but the Irish company makes huge amounts that are taxed under very friendly Irish tax law. If the US somehow seized a percent of foreign-company held assets in US accounts by claiming they were actually untaxed profits of US companies, it might send a lot of capital fleeing. That wouldn’t necessarily be a bad thing, IMHO.

      1. John Zelnicker

        @Skip Intro – Capital denominated in dollars has nowhere else to go. See my comment below to pictboy3. If the US were to seize foreign company owned assets, then US company owned assets in those countries could be subject to being seized in retribution.

        One solution might be to regulate transfer pricing. That’s the concept you are referring to when you write about the high price charged by the Irish company for IP. That might be difficult because you would have to value the IP which is hard because there are few direct comparables. Another possibility is to tax US companies on their worldwide profits like the US does to its citizens.

    2. John Zelnicker

      @pictboy3 – The dollar has nowhere else to go. You can’t use it to buy anything of significance anywhere but in the US. If you want to buy property in Britain, you have to convert it to pounds, or to the Euro in the Eurozone. How many US merchants do you think want to take Euros for that suit you want to buy, or the construction materials for your new home? It’s the same everywhere. People want to use their local currency unless they plan to spend foreign currency in that foreign country in the very near future, e.g., importers.

  3. Wandering Mind

    So, a question more than a comment regarding the distinction between onshore and offshore funds.

    Zoltan Pozsar has a paper, here, which is saying that, because of money market fund reform, that source of Eurodollar funding has dried up.

    The result is that U.S. banks are now the source of Eurodollar funding but, because of newish regulatory constraints (i.e. Basel III), there is a price impact on that type of Eurodollar funding, and eventually an outer limit to the total such funding which will be available.

    Pozsar focuses on the need for the Fed to use its existing swap-line agreements to become the public provider of such funding, presumably because the Fed does not have such a balance sheet constraint.

    But FT Alphaville uses Pozsar’s paper as a basis to assert that the offshore dollar market will be negatively impacted by “on-shoring” of dollars as a result of tax reform.

    If Yves is correct, however, and those “offshore” funds are in fact now held in “onshore” U.S. Banks, I don’t see how FT Alphaville can be correct.

    OTOH, if FT Alphaville is correct regarding the impact of “onshoring” on Eurodollar funding, then it would seem that Yves and other analysts should take that into account when analyzing this proposed change in the corporate tax structure.

    I.e., to the extent that FT Alphaville is correct, the “onshoring” of dollars is a negative for the international money markets, with knock-on effects on trade, etc.

    I suppose the above is about as clear as mud, but would appreciate any comments comparing the FT Alphaville take on Pozsar to his actual note.

    1. Yves Smith Post author

      This statement is just plain wrong:

      That’s because corporate earnings held overseas are a significant part of the offshore market for dollars, he says

      As in Pozsar may believe it but he’s utterly incorrect. FT Alphaville is relying on a bad source.

      1. Wandering Mind

        Comparing the statement in FT Alphaville to Pozsar’s paper itself, I’m not so sure that is what Pozsar says.

        All he talks about is money market funds as a source of eurodollar funding drying up and U.S. banks as a source of the same having constraints on their balance sheets, which in turn limit the total funding available and impose additional costs on swaps.

        What I take from Yves’ commentary, though, is that dollar balances at U.S. banks would be available for eurodollar funding regardless of their tax status.

        If so, then FT Alphaville has read something into Polzar’s paper which isn’t there.

  4. jfleni

    The Title is the fundamental premise and salient point of the article.

    It’s easy to remember when WSJ was a serious and authoritative paper not ever sticking its foot between its jaws; but the rise of the ignorant moneybags “kangaroo in chief” changed that forever!

  5. RabidGandhi

    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

    As a currency issuer, the US Government does not need tax revenues (from offshore-booked profits or elsewhere) to fund its spending, so what jalopy is Obama pushing to get his buds a tax break?

    Taxes are useful for wealth distribution and discouraging behaviours harmful to the community, but they have no relation to infrastructure spending. Obama is either clueless or acting in bad faith.

  6. ChrisAtRU

    Thanks for this. There is a general fallacy about money having to reside with its owners as it were (see also foreign debt). I recall a recent period of emerging market volatility where the hot money was supposedly in Argentina for a while, followed by a sudden shift to Turkey (?) on a whim. Something then caused the Turkish market to fall out of favor, and I joked to a colleague that if money really moved from place to place, there’d be jumbo jets making U-turns over the Atlantic.

  7. BecauseTradition

    Someone correct me if I’m wrong but my understanding is:

    Corporate cash COULD be oversees but only in the form of physical fiat, coins and bills. Otherwise, all US fiat exists in the form of account balances at the Federal Reserve and physical fiat, including bank vault cash, within the US.

    Nor does corporate cash reside in US banks either. Instead what exists in US banks are corporate CLAIMS (liabilities of the banks) for fiat – not at all the same thing.

    Am I wrong?

  8. b.

    The important question about accounting is: qui bono. Why is it done the way it is done? Who benefits?

    Is tax avoidance the issue, yes or no?

    The important question about re-patriation tax holidays: qui bono. Who benefits?

    Is shareholder dividend and executive bonus an issue?

    Is the tax avoidance getting in the way of executive pay-off?

    I see a wall of text, and maybe the point is that top international tax experts say regularly that non-tax people should never write about tax, because non-tax people couldn’t possibly read those writings and understand the point? I sure don’t, today, but then I didn’t get a lot of sleep.

  9. Arizona Slim

    Wait a minute. Is this article confusing cash (an asset on the balance sheet) with profits (which are shown on the income statement)?

    If so, the reporter needs to re-visit his/her Accounting 101 textbook.

  10. plantman

    Stocks appear to think this “overseas cash” is going to increase stock buybacks significantly which will send stocks higher.

    This article seems to suggest that won’t be the case.

    Am I misreading the article??

  11. Chris

    Even if cash is merely “booked” overseas, wouldn’t lowering the corporate tax rate still be good because it makes corporations more likely to pay taxes to the US instead of offshoring them? I understand your point on domestic investment and spending, but I still see a benefit from the perspective of more taxes being paid to the US.

  12. Steve Roberts

    The physical cash may be in the US but the profits are booked offshore and losses are booked in the US wherever possible. That means future investments will be made offshore and not domestically to avoid the US tax system. Will the cash come home? That’s not the point. Will their cash be invested in the US economy? Possibly. But yes the one time tax cut to spur that investment is a misnomer.

  13. GJB

    May I suggest a much more effective way to bring the money back. Instead of reducing the rate from 35% to 10% or 15% why not double the rate to say 70% for all monies not brought back in country by say December 31, 2017. Or at the very least add a 10% penalty, above the 35% rate, every year for monies not brought back. I wonder how long it would take to move these funds back onshore?

  14. [insert here] delenda est

    Is this really the whole picture?

    My super-basic understanding is that most of the money that is “offshore” is effectively very really difficult to spend in the US. Further, the only reason it is not “repatriated” into the accounts of a US company is that it would be taxed. So in a big picture sense, getting rid of the tax disincentive WOULD “bring back” a large amount of the money –> and you are perhaps missing that forest for the trees of what bank actually holds the money.

    Whether that money is then spent on US jobs or manufacturing is another question, and given the current low rates and easy terms for corporate borrowing, one that the market already seems to have answered.

    1. Yves Smith Post author

      These companies have more cash than they know what do do with, and it is invested in the US already. They would NOT invest in their own operations if they got a tax break. We know that from what happened the last time we ran that movie, in 2004. They paid dividend, paid exec bonuses, did share buybacks….while in some cases even firing staff.

      Moody’s found a lot of cash on the balance sheets of non-financial multinationals, and attributed a lot of it to indefinitely reinvested, untaxed foreign earnings. The implication is that we have to give these companies a tax cut right now so they can do something productive with the $2 trillion they are sitting on. Not so fast. Let’s unpack the numbers, using Microsoft as an example. (A full, detailed version appears (paywalled) in Tax Notes.)

      Companies are sitting on wads of cash that is largely held in US accounts, where it is very conservatively invested in US government securities and high grade corporate debt. Basically, some of the largest US companies have partially turned themselves into bond funds. No wonder hedge funds are clamoring for share buybacks! Shareholders should not be paying for big non-financial company managers to invest cash for them. Many of the companies with the most cash, like Apple and Cisco, buy back huge amounts of shares…

      We’re having a tax argument because accounting standards are not being followed. Policymakers know that. But they’re looking for any excuse for a tax cut. So official Washington accepts the storyline of indefinite reinvestment and horrible repatriation taxes…

      Microsoft has $90 billion in cash. It treats a cumulative amount of $93 billion as indefinitely reinvested, and has not booked a DTL for it. The company’s 2014 Form 10-K explains that the DTL associated with that $93 billion would be $30 billion. Microsoft says that while most of its cash is booked offshore, it is invested in dollar-denominated liquid securities in the United States.

      So do we have to give the likes of Microsoft a tax cut to get them to invest in the United States? Nope. If they wanted to invest in the United States, there is always a way. Tax advisers spend their days thinking of ways, faster than the IRS can shut them down.

      Cash representing untaxed foreign earnings can be kept in a US bank account without additional tax. It can be lent to a foreign subsidiary’s US parent for short periods without additional tax (Code section 956). And several types of corporate reorganization transactions are often used to move cash to the United States (Code section 356). The IRS has been at pains to stop these tactics and has not succeeded in stopping all of them.

      The use of cash that multinationals want a tax break for is dividend distributions to US resident shareholders. When they got that tax break, in 2004, they repatriated their untaxed foreign earnings primarily in the form of dividends (Code section 965). There wasn’t a sudden surge of US investment. Some companies even fired thousands of employees at the same time.


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