Why Investors Can't Get More Cash Out of U.S. Companies

Wall Street Journal ^ | 02/19/2011

[SeekAndFind]

Earlier this month, Microsoft borrowed $2.25 billion in unsecured debt. What in the world possesses a company with $40 billion in cash and short-term securities to go out and borrow money?

Rock-bottom interest rates are one reason. But the bizarre, byzantine U.S. tax code seems to be another.

Microsoft declined to comment on whether its recent borrowing was partly driven by tax considerations. But, like many purportedly cash-rich companies, Microsoft can't bring home much of its cash without writing a fat check to the Internal Revenue Service.

Politicians have been carping about the more than $2 trillion in cash sitting idle in corporate coffers even as unemployment remains high. But much of that cash isn't in the U.S.; it is abroad. And it isn't likely to come back home unless U.S. tax laws change.

David Zion, a tax and accounting analyst at Credit Suisse, estimates that the companies in the Standard & Poor's 500-stock index have "north of $1 trillion" in undistributed foreign earnings, or profits that have been parked overseas to avoid U.S. tax. Not all of that is cash; some is in the form of inventories or other assets.

U.S. companies are taxed at up to 35% when they bring home the earnings generated through the operations of their overseas subsidiaries. They get a credit for any taxes paid to foreign governments—but, since the corporate-tax rate in the U.S. is one of the world's highest, most companies are in no rush to bring the money back onshore. By keeping those earnings abroad, U.S. companies can indefinitely defer their day of reckoning with the IRS.

That can put firms in the peculiar position of having tons of cash offshore that they might need but can't use at home without taking a tax hit.

[WaterBoard]

Thank President Bill Clinton for these regulations that make it more profitable to invest in other countries than the USA.

[mewykwistmas]

Change the law, but only after they stop taxing private persons for money earned anywhere in the world.

[PieterCasparzen]

Large publicly held corporations are run by people with VERY LITTLE skin in the game, in essence, the most political suck-ups of the corporate culture. Hence, they want to look good during their short tenure as CEO. Hence, having operations in a communist country looks good on paper, so they do it. If you owned a company with a book value of say 2 billion dollars, would you want 1/2 your operations in a communist country ? Afraid not, because you would realize the risk of your supposed assets, let alone "profits" not making it out of the communist regime at some point in time.

Privately held corporations, where shareholders are people, not funds or other corporations or the public at large who buy and sell shares with the wind, have a set of shareholders who are individuals that own and operate the company over decades. Their exit strategy is locked up in the true value of the company, and they tend to run their businesses more like the true meaning of the phrase "free market" than publicly-held companies. Risky practices are far less likely when the owners have to face the consequences in their own personal pocketbook.