Multinational companies the world over ranked the US as the “most efficient” country from which to repatriate their hard-earned cash in a recent Euromoney pulse survey.
The irony is that for US multinationals, the US is the least tax efficient country to which to repatriate their hard-earned overseas cash.
US tax rates on repatriating overseas cash are so high that US multinationals are avoiding such transfers and are raising debt instead.
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Apple is a case in point. At the end of April, the company sold a further $12 billion of bonds in addition to the $17 billion it sold last year, partly to fund up to $90 billion in planned share buybacks.
With some $150 billion of cash on its balance sheet, Apple has the money to fund the buybacks itself. However, about 88% ($130 billion) of its cash pile has been generated overseas, and repatriating it to the US would mean incurring a tax charge as high as 35%.
Apple is not alone among cash-rich US multinationals in using the bond markets as the next best alternative to repatriation, a strategy that rating agency Standard & Poor’s argues is a form of “synthetic repatriation”.
In a recent report the rating agency said total cash and short-term investments held by 1,700 US non-financial companies it rates hit a record $1.53 trillion at the end of 2013 – 11% up on 2012.
Strikingly, the US’s top 25 largest cash-holders in S&P’s universe – Microsoft, Google, Verizon, Cisco Systems and Apple make up the top five – control 43% of the total $1.5 trillion in cash balances.
S&P found that the top 15 cash-holders that disclosed regional cashflow information raised cash balances by 14%, or $44 billion, during 2013. Of this the companies generated $45 billion overseas, indicating that their domestic cash balances actually fell $1 billion during the year.
“Most importantly, debt issuance by these 15 companies totalled $45 billion, exactly matching their overseas cash growth,” says S&P.
While activist shareholders in these companies have no doubt benefited from this trend, creditors might have some cause for concern.
Not only is the US bond market at risk of being saturated by jumbo bond sales from cash-rich multinational companies, but sooner or later this rise in net debt among them could be expected to affect their ratings.
Also worrying for creditors and shareholders is that liquidity appears plentiful, but accessible liquidity is not.
That will continue for as long the US tax rate on repatriating overseas cash is as high as it is.