Out of Exile

The tax cut on foreign earnings only seems restrictive. But some companies remain wary.

Like other multinationals, Dell Inc. has amassed an impressive pile of overseas cash: $4.1 billion, to be exact. That hasn’t been returned to shareholders or reinvested. Instead, it sits in accounts in Europe and Asia, “permanently” reinvested to avoid the 35 percent tax the company would normally pay if it decided to repatriate that money.

Now Dell is preparing to send those earnings home because of the provision in last year’s American Jobs Creation Act that temporarily drops the tax rate for repatriated earnings from 35 percent to 5.25 percent. Moving the money won’t be easy. The company will need to position cash from long-term to short-term investments (only cash can be repatriated), roll up earnings out of foreign subsidiaries, and document where the money is coming from and where, exactly, it is going.

The computer maker also needs to comply with a list of restrictions that bars companies from spending the cash on such items as dividends, share buybacks, or executive compensation (see “Forbidden or Not?” at the end of this article). “This isn’t rocket science,” says Dell’s group treasurer, Brian MacDonald, “but it does require a lot of plumbing.”

Some companies seem to have decided that the tax cut is more trouble than it’s worth. Xerox, for example, says it doesn’t see “material benefit” from the incentive, and is unlikely to repatriate any of its own foreign earnings. For others, the investment opportunities abroad may simply outweigh the tax savings at home. General Electric has $14 billion in eligible foreign earnings but will bring little of it home, preferring instead to invest that money in fast-growing emerging markets.

Overall, this provision of the Jobs Creation Act isn’t likely to create all that many jobs. One reason is that the earnings returning to the United States will probably be far less than the law’s boosters predicted. Chris Senyek, an accounting analyst with Bear, Stearns & Co., predicts that out of $421 billion in eligible earnings, only $175 billion will actually be repatriated. (Previous studies had put the number closer to the full amount.)

The other, more important, reason is that the restrictions Congress imposed on how companies can use their savings are looser than they appear. Indeed, many analysts predict that much of the money will go to the very things that aren’t allowed under the rules, including dividends and stock buybacks.

How to Spend It

As it happens, the act does explicitly allow some investments with little, if any, direct link to new jobs. For example, mergers and acquisitions, advertising, and debt repayment are all permitted. Paying back creditors should be especially popular. Louise Purtle, chief strategist for London-based research firm CreditSights, argues that while today most large companies have strong balance sheets, it may be a good time to reduce leverage. “We are probably just past the peak of the credit cycle,” she says. “And with interest rates going up, now would be a good time to start paying debt if you can.”


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