Monday, August 31, 2015

Seve141 on "Overseas Profits"

MNE commentator Seve141 dispensed a keeper earlier today:

I believe the author's choice of words are somewhat misleading. 
"stash $2.1 trillion in profits in overseas banks" 
The $2.1 trillion is net of taxes already paid from taxable income in foreign (non-US) jurisdictions. Generally speaking, these are foreign subsidiaries of a US parent company domiciled in the US for tax purposes. 
The bank accounts that hold this money are legally owned by the foreign subsidiaries of US parent companies and may well be at BoA in Manhattan or not. The physical location of the actual bank account isn't important. 
Also, the $2.1 trillion is an aggregate translation of all the local currencies to US dollars, It is not physical US dollars or US dollar bank balances.
The US parent company (domiciled in the US for tax purposes) would very much like to dividend the cash from the subs to the parent and then use that $2.1 trillion for shareholder dividends, share repurchases, bonuses, investments etc. However, if they do so, the US tax code will tax them on that cash dividend from the subsidiary to the parent -- hence the phrase "allowing them to stash $2.1 trillion in profits in overseas banks to avoid paying taxes" 
The US multinational corporations are lobbying and playing a waiting game hoping for another tax holiday ( such as in 2004) allowing them to repatriate foreign profits to the United States without tax consequences.
The phrase stash $2.1 trillion in profits in overseas banks is a loaded one.
Aces Seve.


Ryan Harris said...

I've noticed that companies with large cash-stashes and complex international tax strategies tend to issue bonds, usually token amounts, in various markets around the globe to determine market rates of interest. Then I assume that they loan money from their subsidiaries back to the parent using those rates as guidelines to justify the rates they charge the related company.

Given all that, much of the stashed cash, probably shows up as financial debt or money market debt that will simply be destroyed once the tax liability is extinguished. The entire tax strategy is based on the idea that the government will fold before they do. The best thing that the US Govt can do, is nothing or eliminate the tax loophole that allows laundering profits through subsidiaries that do nothing in the first place but have dubious sales to put technology assets, patents, and other things into their possession. So scrutinize the "hard to value" assets transferred from the parent to the subsidiary and scare up the hornets nest. Make the whole tax avoidance game less profitable by tangling companies in hard to win legal battles with endless numbers of attorneys and accountants. Lots of Good Middle Class jobs there.

Ignacio said...

Exactly Ryan, the way to fix tax avoidance it's to make it not profitable. This would even increase income for the state, as you can't lose a game you make the rules for..

However this requires non-libertarians in govt positions and no revolving doors. So for now it won't happen. And politicians always use the excuse that they will go to other place, which makes no sense whatsoever but is like the running out of money meme.

Unknown said...

why tax the corporations, they are just legal constructs? If you dont like rich people having too much money, tax the dividends and capitals gain incomes, why punish the country by preventing those companies from bringing that money back to be spent here (surely some of it will go back into the business and any positive number is good for the economy). Dont we want our corporations to win against their corporations? Just another example of terrible economic ideas from democrats.

Unknown said...

Or for that matter, if you really want American companies to have a competitive advantage, maybe we should stop making them responsible for the health care of their employees but their retirements also? What sense does it make to have businesses be responsible for that stuff?

Matt Franko said...

Auburn, "Because they have all the money!" ;)

Peter Pan said...

Paul Craig Roberts has suggested preferential tax rates.