Will Repatriating The $1.5 Trillion U.S. Corporate Cash Hoard Boost The Dollar … – Seeking Alpha

First of all let me remind readers of the recent debate about tax avoidance and how companies use different types of techniques to avoid taxes, here, here and here. I have said many times that sooner or later many of the international tax loopholes will eventually be done away with, and that means many companies will have to pay higher taxes sooner or later.

However, the U.S. has the highest corporate tax rates in the world. Companies theoretically pay a 35% tax rate and that does not include state and other local taxes. Asking U.S. companies to pay so much taxes is very burdensome, and no wonder many companies like Apple (AAPL) and Google (GOOG) have found a legal way to avoid paying such high taxes.

Eventually the U.S. corporate tax rate will have to be lowered to a reasonable level of 15% – 20% when international tax loopholes are done away with. Because if they are not — and companies are forced to pay the 35% rate — that will be very detrimental to the U.S. economy. Let me explain.

Cisco’s (CSCO) CEO John Chambers has repeated over and over that unless the U.S. tax code is changed, Cisco will not acquire any more companies in the U.S. and will also not hire any more people in the U.S. Chambers did not say these things because he is anti-American, but because most of Cisco’s money is overseas and if repatriated, it will be subject to a 35% tax rate. Cisco made two acquisitions so far for 2013, none in the U.S.

Cisco is not the only company that has this problem. Remember Apple has $102 billion overseas and it preferred to take out a loan of $17 billion to pay dividends and buy back shares, instead of using the money it has overseas.

So one benefit of lowering corporate tax rates is that many companies like Cisco will put a lot of that money to work in the U.S. And the truth is that we are talking about a lot of money, about $1.5-1.7 trillion.

When a lower tax rate means more taxes …

While most U.S. multinationals claim they pay on average 25% in taxes, in reality they pay a whole lot less than that. As in the case of Apple, most profits of many U.S. multinationals have come from overseas sales. Most of those profits are taxed at a very low rate (2% in Apple’s case) via subsidiaries in foreign shell companies like Ireland, and thus avoid paying almost no taxes on international sales.

So in reality, even if many companies like Apple, Google and Microsoft (MSFT) are forced to pay 15% – 20% taxes on profits, that is still much more than what the U.S. government gets today. So lowering taxes and closing loopholes will actually boost taxes paid by most American multinationals.

At the same time this will not really affect share prices or the major U.S. indices (SPY), because most of those taxes are already a liability in their balance sheets.

So lowering tax rates the U.S. will probably boost taxes and at the same time that will also benefit the U.S. economy, because a lot of that money will be put to work.

Will dollar repatriation boost the dollar?

For starters, in order for the dollar to get a boost from Apple’s overseas cash hoard, the money would have to be in a foreign denomination. So when Apple would bring that money back to the U.S., it would buy dollars and sell euros, for example, something that at the margin would boost the dollar in forex markets.

So the answer is yes, the dollar would get a boost if the $1.5 trillion U.S. corporate tax hoard would be repatriated and if it was really in some sort of foreign denomination.

However, if one listens closely to the recent Senate subcommittee hearing on Apple (conformed by a NY Times story here), Apple’s $102 billion cash hoard is actually in a bank in NY and not overseas.

Apple’s $102 billion in offshore money is managed by one of its wholly owned subsidiaries in Reno, Nev., and the money is controlled by Apple company bookkeepers in Austin, Tex. What’s more, the funds are held in bank accounts in New York, invested in dollar denominated government securities.

How so? Well, because the $102 billion is technically assigned to two Irish subsidiaries, the U.S. tax code considers the money to be under foreign control, and Apple is legally entitled to avoid paying taxes on it.

So not only is Apple’s cash hoard not in any foreign country and not in any foreign denomination, it is denominated in U.S. dollars and in U.S. banks. As a result, if and when some kind of a tax holiday is legislated and most of this money is “repatriated”, it will literally have no effect on the dollar, because the money is already in U.S. dollars and it is already on U.S. soil.

Bottom line

Lowering the U.S. tax rate will increase the taxes paid by most U.S. multinationals, because their tax rate today is much lower on average than what they claim on their balance sheets anyway.

While the dollar will not receive an immediate boost from “at the margin forex transactions,” the dollar will still benefit longer term, because if much of that money is put to work, increased manufacturing capabilities, M&As and R&D will eventually make the U.S. more productive and that will eventually boost U.S. export of goods and services in the long term.