In November 2016, Donald Trump was elected as the next president of the United States of America. During the nineteen month built up to the election, Trump made a number of promises as part of the “Make America Great Again” campaign, and these includes promises like making Apple build the iPhone on American soil, and reducing the tax to be paid on American businesses repatriating cash back into the United States, which could really benefit Google and other tech firms. Since the result of the election was announced, Trump has not had the opportunity to outline this proposal in any detail and it could be some weeks before we receive any news. We have seen a similar reduction in the repatriation tax rate applied in the past; in 2004, President George W. Bush introduced a temporary drop in this tax to 5.25%, which encouraged companies to reintroduce $312 billion back into the United States. According to industry experts and excluding financial businesses, U.S. companies hold $1.3 trillion of cash outside of the country.
The reason why so much tax has been accrued off American soil is simply a result of the tax regime that American businesses operate in. The U.S. corporate tax rate of 35% would be applied on this cash and in order to keep the overall tax rate down, those businesses with overseas earnings may keep the cash overseas. Of the estimated $1.3 trillion, the top five companies should be familiar to readers: Apple, Microsoft, Alphabet, Cisco and Oracle, according to Moody’s. These technology businesses have considerable interests away from American soil and have kept significant cash deposits elsewhere.
We cannot be certain what impact repatriating this cash would have, because big businesses have many years of using this cash without actually directly spending it. This can include using this to buy an overseas business and a recent example of this is Qualcomm’s recent acquisition of the Dutch company, NXP Semiconductors. Other businesses use this cash to issue debt, which could itself be used for corporate deals. The 2004 repatriation dollars reintroduced back into the American economy were, generally, not used for inwards investment such as hiring new workers or building new factories, but instead were used for stock buybacks (a means of propping up share prices) and executive benefits (a means of rewarding senior management). There are very good reasons for this – one only has to consider why Apple build their products overseas, and this is because it is cheaper (and so from a business perspective, more efficient) to build the iPhone in a Chinese factory and ship it all over the world, than it would be to build the device using American workers in a California factory.
A 2011 Democratic staff investigation into the 2004 offshore cash repatriation discovered that the top fifteen companies reduced the size of their workforce and the amount of investment into research and development. It declared the 2004 tax break as “a failed tax policy” and estimated that the policy change cost the U.S. Treasury around $3.3 billion in the following ten years. It also resulted in U.S. businesses keeping more funds off American soil as a means of deferring tax earned on overseas profits. Furthermore, these effects were despite the legislation for the temporary tax rate in 2004 insisting that companies use the repatriated cash for hiring US workers and conducting research and development on U.S. soil. The cash was not to be used for share buybacks or executive compensation. In effect, those businesses that had significant overseas earnings could use the cash taxed at 5% rather than 35% and this line of thinking directs us right back to the technology industry, where many companies may be relishing the opportunity to pull monies generated overseas back onto American soil with a much reduced tax rate.
The world is a very different place in 2016 compared with 2004, but the most expensive words uttered in history remain “this time it’s different.” Following the 2004 drop in repatriation tax, many businesses started using sophisticated tax schemes to avoid, or defer, paying U.S. taxes on business income. This practice continues today, especially within the technology sector and is unlikely to change should Trump introduce this policy change next year. It may come with different restrictions as to how the scheme may operate and we are going to have to wait for clarification – but it is possible that America’s high tech companies could be about to receive a shot in the arm.