U.S. firms reel in more overseas profits than anticipated
The U.S. Commerce Department revealed last month that U.S. firms repatriated more than $776 billion in profits made overseas last year. This is over $111 billion more than originally anticipated.
The eclipse in expectations can largely be attributed to the 2017 Tax Cuts and Jobs Act passed under the Trump administration. Before the Act, the U.S. generally taxed foreign profits if they were transferred back to the U.S. parent company, whereas profits reinvested in the foreign subsidiary could circumnavigate the tax.
The Tax Cuts and Jobs Act completely altered this rule. As of 2018, companies would face a one-time tax on foreign profits previously accumulated, and the tax on new profits was significantly reduced.
This has resulted in an increase in dividends and stock buybacks to shareholders. In fact, share repurchases by S&P 500 companies set record highs in each quarter of 2018, climbing to roughly $806 billion total – a 55 percent year-over-year increase.
“It’s good that companies can repatriate tax-free, because before, you had this artificial arrangement of a lot of money piled up in the foreign subsidiary’s bank accounts when there’s no real tax reason for it to be there,” American Enterprise Institute scholar Alan Viard explains. “Instead, it could go to a U.S. parent company’s bank account, and the parent company might choose it for dividends or stock buybacks. Companies should have the flexibility to do those transactions if they’re convenient.”
Viard explains that the repatriation tax cuts in the Act might not lead to U.S. reinvestment, as some proponents predicted. Because U.S. parent companies must continue to reinvest in their foreign subsidiaries and generally have separate means for domestic reinvestment, the repatriation of more profits does not signal the domestic progress of U.S. firms.
“They could go out and do more factory and equipment investment, but unless companies were already tight on money, they were presumably already doing their profitable investments anyway, so we wouldn’t expect that to happen,” Viard continues. “Some critics of the law really think this is a problem; they say, this thing was supposed to spur new investment and buybacks. Well it is supposed to spur investments, and it should spur investment, but not because of repatriation. It should spur new investment because investment in the United States is more profitable than it was before.”
International sales were crucial for many U.S. firms last year. According to AEI scholar Mark Perry, many of the largest U.S.-based multinational companies – including Intel, Johnson & Johnson, and Mondelez – have more than two-thirds of their total sales outside of the United States.
But on the investment side, there is still room for growth, domestically. Johnson & Johnson, Mondelez, Amazon, and Chevron, for example, had two-thirds of their assets overseas. But with the Tax Cuts and Jobs Act, this proportion could shift more to the United States.
“The long-term viability and sustainability of U.S. MNCs [multinational corporations] forces them to minimize production costs for their customers in global markets, and sometimes that requires them to shift production and jobs overseas, possibly to take advantage of lower labor costs, lower taxes, or more favorable regulations,” Perry said.