Why do firms hold so much cash overseas?
Source: Capital Economics
As the global economy has grown, cash held overseas by US firms has grown at a rapid pace. US companies now hold over $2.5 trillion. The recent flap over Apple’s $14.5 billion fine by the European Commission brings into high relief the fact that the US has the highest corporate tax rates in the world, and claims a share of anything a US company does—if it brings those profits back home. So if Pfizer invents and tests a drug in Cambridge, England, manufactures it in Switzerland, and sells it in Africa, the US government wants a share of the profits.
Most of that cash is held by the biggest US companies. Microsoft and GE hold over $100 billion each. This vast pile of foreign money could provide a boost to GDP if it were ever brought home—a prospect that now doesn’t seem quite so remote. Both major party nominees for President have pledged to address this issue. Corporate inversions—where US companies change their domicile to a foreign address—have become increasingly common.
If companies repatriated their overseas cash, this probably wouldn’t lead to a surge in investment spending. After all, most of these companies have sterling credit ratings and face extremely low borrowing costs. If they had major projects to invest in, they could already do so. It’s more likely that the money would be returned to shareholders in some way—through dividends or stock buybacks. This could still provide an indirect boost to the economy, though, if shareholders spent part of their windfall.
It’s astounding that so many trillions of dollars are held overseas when our economy provides the best growth prospects anywhere. With the European Commission now setting its sights on McDonald’s and other US firms, finding a way to bring these dollars home—without paying a huge tax penalty—makes a lot of sense.
Douglas R. Tengdin, CFA
Chief Investment Officer