Wolf Richter: Come on Moody’s, Spare Us These Falsehoods: That $1.3 Trillion “Overseas Cash” Is Already in the US

Yves here. Wolf addresses a pet peeve, and even better, in long form.

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

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.

Now Moody’s Investor Services repeats the same falsehood and explicitly lobbies Congress to give our poor, multinational Corporate Titans with their hardscrabble businesses another tax break.

The biggest US non-financial companies that pay Moody’s to rate their credit worthiness “will increase their cash holdings to $1.77 trillion by the end of the year, from $1.68 trillion at the end of 2015,” Moody’s writes. And it goes on:

Most of the cash that companies have is generated and being held overseas. Moody’s estimates that the amount of overseas cash will reach about $1.3 trillion, or 74% of total cash, in 2016. That’s up from an estimated $1.2 trillion, or 72% of total cash a year earlier.

For US tax purposes, these funds are classified as “permanently invested overseas” and thus are exempt from federal corporate income tax until they’re “returned” to the US. These overseas cash holdings have “more than double in the last ten years,” Moody’s reports.

By contrast, US individuals have to pay federal income taxes on all their income, even income they earn from overseas sources while living overseas. The US is one of only a few countries that mistreats its citizens that way. But the largest corporations are coddled and get very special treatment.

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.

These revelations explained another corporate mystery that had long baffled economists. In 2004, after heavy lobbying by our Corporate Titans, Congress declared a “repatriation holiday” to encourage the “return” of $300 billion in overseas cash to be invested in the US. This would cause a burst of investment and hiring in the US, it was said. This was similar to what Moody’s is now clamoring for on behalf of its clients, except this time, they want permanent tax reform rather than a one-time “repatriation holiday.”

So in 2004, our heroes made some adjustments on their books to “repatriate” these profits that were then taxed at the special and minuscule rate of 5.25%, less than the payroll taxes withheld from their US working stiffs.

And then nothing happened. There were no investments and no hiring and no benefits for the economy because the money had already been deployed in the US, as we now know. In May 2013, as a result of the Senate hearings, the New York Times summarized the 2004 phenomenon this way:

On the contrary, some of the companies that brought back the most money laid off thousands of workers, and a study by the National Bureau of Economic Research later concluded that 92 cents on every dollar was used for dividends, stock buybacks or executive bonuses.

This sort of “repatriation holiday” or tax reform would simply be a handout benefitting our Corporate Titans, but not the millions of smaller companies that don’t have the resources to lobby Congress, make special deals with foreign governments, and create that “complex web” of offshore mailbox companies. They’re too busy struggling on a daily basis in their dog-eat-dog world.

Subcommittee Chairman John McCain thundered in his opening statement of the hearings that it was “unacceptable that corporations like Apple are able to exploit tax loopholes to avoid paying billions in taxes.” Since then, nothing happened in Congress. The loophole wasn’t closed. And the falsehoods that had been stabbed many times during the hearings have once again risen to shine in even greater glory, with Moody’s adding some additional sparkle.

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  1. skippy

    Until we know the investment particulars we don’t know what this money is actually doing, no matter where it resides… might as well all be in cash… a la Buffet, so were right back to the conundrum of hording and its dilemma…

    Disheveled Marsupial….. irrational fear[s assisted by atomistic individualism in its many guises e.g. rational agent models et al…. computationally enhanced….

    1. JEHR

      I’ll take a guess at what the money is actually doing: making more money in speculation, buy-backs, paying huge pensions and bonuses to CEOs, etc.

    2. John Zelnicker

      @skippy – According to Yves, the Apple group in Reno runs their money like a hedge fund. I would assume that means that they make investments to hedge whatever financial risks they perceive as bearing on the company, as well as speculative investments in the hope of hitting a ten-bagger.

      @JEHR – Since they carry the cash on the books of a foreign subsidiary, they can’t use it directly in the company for buy-backs, pensions, and executive comp. That’s why they borrowed the money for the dividend and buy-back program.

    3. skippy

      Yeah John I’m aware of that and wee bit more, their not the only ones tho as quite a few of the C-corps are going this route, even some mid cap. Mate just left a T1 globally accredited construction mob for just that reason, everything is conceptualized as a financial deal for leverage et al and not the actual construction – industrial production facilities.

  2. sd

    Apple is going to need every cent it’s got to fix the disaster of its new MacBook Pro – which is anything but. It’s pretty clear that the one thing they are not spending money on is decent research and development.

    1. Lambert Strether

      Who’s doing the engineering on the MacBook, anyhow? H1B’s who used to work at Samsung?

      It was clear that Apple held Mac users in contempt when it got rid of the MagSafe connector. Now we have to worry about trashing a $1500 machine when somebody trips over the power cord again. Well played on the crapification, Tim, well played.

      1. BecauseTradition

        What’s with the missing bite in the Apple logo? A reference to Adam and Eve and the Tree of Knowledge?

    2. Arizona Slim

      Tell me about it. I was planning on replacing my venerable old IBM ThinkPad with a Mac laptop.

      Uh, no.

      I’m going to stick with the ThinkPad line, which is now made by Lenovo.

  3. BecauseTradition

    Money doesn’t stop at borders.

    Huh? Isn’t all fiat except physical fiat (e.g. $100 bills) “stored” at the central bank? Where negative interest can easily be applied as an inescapable tax*? With an exception for individual citizen accounts up to, say, $250,000?

    Also, negative interest on fiat account balances at the central bank has the additional advantage of making less negative yeilding sovereign debt attractive by comparison so that we should hear no more complaints about the national debt since it would be earning, not paying, interest.

    *Physical fiat can be taxed too:
    a) when it is bought from the central bank.
    b) when it is sold to the central bank.

  4. The Other James

    I’ve always wondered what this capital thing is, that can turn up at the flick of a switch, move across continents electronically, is good if it is owned by home boys, but really bad if owned by Chinese state corporations, and yet somehow has the capacity to take say, a vacant block of land down the road, and build a factory on it from stuff around here, and then get people who all live close by clocking in and out, and supporting their families, and doing stuff, like living. Marvelous stuff.

    1. BecauseTradition

      Marvelous stuff.

      I’ve never found wage slavery to be marvelous except for one job where:
      1) I could set my own hours – when and how many.
      2) I was well paid.
      3) I could do the work as I thought best as long as it got done.
      4) I could socialize at work.

        1. BecauseTradition

          Never, because as my marvelous cubemate use to say, “Where ever you go, there you are.”

          1. BecauseTradition

            Meaning I was never in danger of thinking I was in Heaven since I still had myself to contend with.

  5. craazyboy

    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.

    That’s only half the tax story. Multinationals in general use accounting wiggle room to make “costs” appear in high tax locals and profits appear where they can indefinitely defer tax liability. What is sometimes called “transfer cost” in accounting parlance is a notorious area where tax dodges are implemented.

    So the net effect is profits that were made in the US market from US consumers are made to appear as “foreign profits” in the corporate tax books. They then use the argument that the US taxes overseas profits higher than any other country as justification for “special” tax deals to “bring the profits home”. [and pay a few pennies for “infrastructure”, [so execs can have nice roads and bridges and airports and national and international security]]

  6. JEHR

    “Playing with the books” is a global phenomenon: Canadian companies use a number of accounting measures to inflate earnings and decrease expenses so that shareholders’ profits look better; e.g., using asset impairments, stock option compensation expenses, restructuring or other “non-recurring” expenses, and so on. Accounting has baked-in ways for companies “to make costs appear lower, to ignore real losses, and to make their profitability seem higher.” (Quotations from The Globe and Mail, Saturday, September 4, 2016 page B9)

  7. BecauseTradition

    “Playing with the books” is a global phenomenon: JEHR

    Which is why taxes should be inescapable, e.g. land taxes and negative interest rates on fiat? To avoid violating equal protection under the law in favor of cheaters and the crafty?

  8. Dave

    Can I make a humble suggestion here?
    Why not finance the U.S. based on taxing debt instead of income?

    Wouldn’t that encourage savings that could be used for investments and discourage debt?

    1. BecauseTradition

      Wouldn’t that encourage savings that could be used for investments Dave

      Or those savings could be hoarded with the savers free-riding on the risk-taking of others – assuming those others do not hoard too. So it would be better to tax savings beyond, say, a $250,000 limit per individual citizen.

      But I agree that income taxes, being avoidable, are probably ill-advised.

  9. Barry disch

    How about an automatic payments tax? The red book at the BIS shows in the US alone there are 4500 trillion in settlements. Taxing at .1 percent would allow you to get rid of payroll and corporate tax and still have 500 billion left over.

  10. Jesper

    & to invest there is a need for demand – demand which seems to decreasing as inequality is increasing.
    What kind of new investments would those companies do (any examples)? That is, even if the money wouldn’t already be available for investment in the US….

  11. Webstir

    Can someone please explain to me why we don’t simply tax shareholders proportionally to the shares they hold?

  12. cwaltz

    “By contrast, US individuals have to pay federal income taxes on all their income, even income they earn from overseas sources while living overseas. The US is one of only a few countries that mistreats its citizens that way. But the largest corporations are coddled and get very special treatment.”

    It seems to me that these individuals should sue the US government using the equal protection clause. If corporations are “people” they should not be subject to special privileges that are not afforded to citizens.

    1. Mike G

      And why does Alternative Minimum Tax apply to individuals but not corporations?
      No more of this corrupt loophole sleaze where GE or Boeing end up paying no federal income tax each year.

  13. RBHoughton

    Along with the tax-free profits of engulfing corporations we should add the balances held in all 30+ tax havens around the world.

    All that fragrant money is in New York carrying the weight of the recent rounds of derivative issues.

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