By Ethan Baron, Mercury News
A tax plan from President-elect Donald Trump could solve one of the biggest problems facing the Bay Area’s tech industry: billions in cash parked overseas, with foreign governments itching to get their hands on it.
“The other countries are just going to start grabbing it,” said Rob Atkinson, president of the Information Technology and Innovation Foundation. “For every dollar that they take it’s less money that U.S. taxpayers get.”
Major tech firms hold hundreds of billions of dollars overseas to avoid paying U.S. taxes. The companies often pay minimal tax to the countries where the income is booked. Now countries are looking for a bigger piece of the pie. Indonesia, France, Italy and the U.K. have all gone after Google for taxes they say they’re owed. In August, the European Union ruled that Apple owed Ireland $14.5 billion over profits from the firm’s Irish subsidiaries.
Earlier in August, Apple CEO Tim Cook had told The Washington Post the company would repatriate its overseas stockpile if tax reform led to a “fair rate,” which he expected to occur next year.
In September, Cook said the company would bring home some or all of its hundreds of billions of dollars in overseas cash — he didn’t specify from which countries — and had set aside “several billion dollars” to cover the expected tax on the repatriated funds, the Financial Times reported.
Tech companies hoard more cash than any other industry. Apple, Google’s parent firm Alphabet, Microsoft, Cisco and Oracle hold the most, according to research and ratings firm Moody’s. The five firms’ cash reserves will hit $587 billion by year’s end, Moody’s projects, with 86 percent of that money, or $505 billion, parked overseas.
As of Sept. 30, Apple had $216 billion overseas; Microsoft had $111 billion; Cisco had $60 billion; Oracle had $51 billion and Alphabet had $48 billion. Bringing the money home triggers a 35 percent federal tax hit.
“You have to think that overall, repatriating the money regardless of how it happens is probably a good thing for those businesses because they’ll have more control over these resources and what they want to do with them,” said Gartner analyst Brian Blau.
Whether a tax holiday for these firms is good for the U.S. economy and taxpayers is a different issue.
“It’s a terrible idea. Giving any kind of a lower tax rate on these profits amounts to rewarding bad actors for trying to dodge taxes,” said Matthew Gardner, senior fellow at The Institute on Taxation and Economic Policy.
Key to the outcome from a special tax break would be whether it allows companies to continue deferring taxes on overseas income until it’s repatriated, Gardner said. Trump had earlier proposed ending the deferral, but that proposal was not included in his official tax plan. Keeping the deferral would encourage firms to continue stockpiling money overseas in expectation of future tax holidays, Gardner said.
Much of the cash held by big tech firms as profits from foreign operations is income “that is substantially earned in the United States and shifted overseas to appear to be earned overseas,” said Omri Marian, law professor at UC Irvine School of Law.
A 2004 overseas-profits tax holiday, with a special 5.25 percent rate, “did not produce any of the promised benefits of new jobs or increased research expenditures to spur economic growth,” the U.S. Senate’s chief oversight committee reported. “The tax break was instead associated with increased corporate stock buybacks and executive pay.”
Without an end to tax deferral, companies then “shifted even more income overseas in anticipation of another tax holiday,” Marian said. Marian said he suspects Apple, Alphabet and other tech firms with substantial overseas cash piles would mostly hand repatriated money to shareholders, rather than boosting research and development, hiring workers or spending on company facilities.
Imposing a requirement that firms invest repatriated cash into research or expansion is virtually impossible to enforce, because companies can simply return money to shareholders that they were planning on spending on research or expansion, said Ed Kleinbard, professor at the USC Gould School of Law.
Not all analysts were pessimistic about how tech firms would spend repatriated money. “By pulling cash into the U.S., I would expect more U.S. capital investments, maybe even factories and mergers and acquisitions,” said Moor Insights and Strategy analyst Patrick Moorhead.
©2016 the San Jose Mercury News (San Jose, Calif.) Distributed by Tribune Content Agency, LLC.
