U.S. Companies Brought Back Foreign Profits as Coronavirus Struck

Date: Monday, June 22, 2020
Source: The Wall Street Journal

Repatriation of foreign earnings surged to $124 billion in first quarter

WASHINGTON—U.S. companies brought home $124 billion in foreign profits in this year’s first quarter, the highest level since an immediate rush after the 2017 tax law, according to data released Friday by the Commerce Department.

The repatriations, made just as the coronavirus-related recession was starting, are a sign of how much companies may have needed cash in their U.S. operations.

“There obviously seemed to be a need to move that liquidity up to the parent” companies, said Todd Castagno, an accounting and tax-policy analyst at Morgan Stanley. “It was just kind of a rush to get to the safest high-level ground as you could.”

U.S. companies made $115 billion in foreign profits in the first quarter and brought $124 billion back to the U.S. That means they were dipping into previously accumulated foreign profits for the first time since 2018 and, on net, not reinvesting any foreign profits abroad. In the fourth quarter of 2019, by contrast, U.S. companies brought home 60% of their foreign profits and reinvested the rest abroad. 

The aggregate data don’t include specific companies or show whether the money was used to pay salaries, dividends, interest or other items.

U.S. companies had long pressed Congress to let them bring foreign profits to their U.S. parent companies without incurring taxes. President Trump pledged in the run-up to the 2017 tax law that trillions of dollars would come home quickly and supercharge the domestic economy.

Since Congress made repatriation a tax-free event, U.S. companies have moved significant sums to their U.S. headquarters, often to repurchase shares and with little clear effect on investment. They also have left much of their stockpiled and new foreign profits abroad. The tax-law change means that this year, as the pandemic’s economic stall rippled through the world, they had readier access to all of their cash.

Companies have also drawn down credit lines, laid off workers, halted capital projects and stopped share buybacks and even dividend payments in the face of the pandemic.

The goal: Bolster reserves in case the crisis deepens or further shocks hit, or the debt and equity markets shut down. Assurances from the Federal Reserve and other central banks have eased concerns about the debt markets, but with so many uncertainties, many executives say they are likely to remain reluctant to reduce their cash holdings.

“The reality is we’re going to have to see how cash generation works in the second half,” Dell Technologies Inc. Chief Financial Officer Tom Sweet said in an interview. The company is closely watching its cash flow to ensure it can meet plans to repay billions of dollars in debt, he added.

According to securities filings, Facebook Inc. had $19 billion in cash abroad as of Dec. 31 and $15 billion as of March 31, as its overall cash holdings increased. United Technologies Corp., which has since completed a merger with Raytheon Co., repatriated $1.3 billion in the quarter. Raytheon declined to comment.

Another large company to repatriate profits this spring was Agilent Technologies Inc. The life-sciences company held $1.02 billion in cash and equivalents abroad as of April 30, down from $1.16 billion at the end of January, its securities filings show.

In the process, foreign cash declined to about 77% of Agilent’s total cash and equivalents from about 95%, even as total cash rose by about 8%. The company declined to say how much it had repatriated during the quarter but noted that foreign cash made up about 78% of the total in early 2019.

“The 2017 tax law changes did simplify repatriation of foreign profits into the U.S.,” an Agilent spokesman said. “We have continued to repatriate cash periodically into the U.S., including this past quarter, consistent with our long-term plans.”

Dow Inc., the chemical company, said in a securities filing that it has repatriated money in 2020 and plans to continue doing so.

Before the tax law, U.S. companies owed the full 35% corporate tax rate on the profits they earned around the world. They paid foreign taxes but didn’t have to pay the difference between those rates and the higher U.S. rate unless they brought the money home.

So they didn’t. Companies parked trillions of dollars in their foreign subsidiaries. They declared the money permanently reinvested abroad, often in segregated dollar-denominated U.S. bank accounts. And they pressed Congress for changes to tax laws.

The GOP-led House and Senate delivered in 2017 as part of a wider tax overhaul. Companies are paying a one-time tax on past profits. For current profits, companies have to pay a minimum tax to the U.S. if they don’t pay enough abroad.

But the act of repatriation itself is no longer taxable for federal purposes; some foreign and state taxes may apply.

That gives companies more flexibility in moving their cash around the world. Because companies could often borrow cheaply in the U.S., free-flowing repatriation doesn’t necessarily mean more investment. Instead, it provides a source of liquidity and can help companies meet immediate cash needs instead of borrowing.

Repatriations jumped to $851 billion in 2018 as companies brought back cash from foreign subsidiaries, often using the money for stock buybacks or dividend payouts. They declined to $396 billion in 2019, decreasing with each quarter.

 

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