Furthermore, the requirements won’t do much to prevent companies from spending their money on prohibited investments. The reason is that while boards must approve detailed reinvestment plans, the law doesn’t require companies to spend any more on approved investments than they would normally. So, for example, a pharmaceutical company that typically spends $5 billion a year on R&D can declare that $5 billion of its repatriated earnings will go toward R&D, thus freeing the $5 billion already allocated for other uses. “On the surface, it looks like you can’t use the repatriated money for share repurchases, dividends, or executive compensation,” says Senyek. “But the reality is that you can. Ultimately, I think that’s what it will be used for.”
Indeed, Congress seems to have overlooked the fact that many companies are already flush with cash and could easily raise capital for domestic investments if they wanted to. From a board’s perspective, a better use of repatriated earnings might be direct return to shareholders.
Don’t expect large one-time dividends, however. The Internal Revenue Service will be alert to obvious attempts to skirt the rules. Instead, analysts expect gradual increases in dividends and other nonpermitted uses of the money. Predictably, companies are cautious in their comments. Brian Byala, assistant treasurer at Pfizer Inc., commented at a recent conference that while it’s possible to get around the rules, a company runs the risk of an IRS investigation. “That’s certainly not a road we’re going down,” he said.
Beyond the government scrutiny, such as it is, the repatriation provision poses other challenges. One is the difficulty of pulling earnings out of local subsidiaries. Treasurers need to unwind intercompany lending arrangements and deal with any local rules restricting the movement of cash outside of a country. In certain places, including China and Germany, these rules might even block the repatriation. “In some countries, regulations absolutely stop the conversation,” comments one banker. “In China, for example, repatriation is a nonstarter.”
Dell has been working on this since the middle of 2004, well before the law was passed. “It’s taken a lot of time to roll our money out of legal entities around the world,” says MacDonald. “Each country has different rules about equity and capital reserves.
“You also need to spend a lot of time preparing the statutory books and getting resolutions from the boards of your subsidiaries to distribute the money,” he says. And while the law doesn’t require companies to set up separate legal entities just to track the earnings, many are taking care to trace the money anyway. “You want good recordkeeping so that when the IRS comes in, you can review everything with them,” says MacDonald.
There is also the task of turning the earnings into cash. Often foreign earnings are tied up in securities portfolios or in physical assets, such as buildings and equipment. “Liquidating your portfolio may take a lot of heavy lifting,” says the banker.