Season Investments


Is Repatriation A Patriotic Duty?

Posted on May 3, 2016

"American corporations have vast untaxed offshore profits. So what?" - Tim Worstall, Forbes contributor


As we all know, election years tend to dredge up a variety of widely debated topics and issues. One big one, obviously, is tax policy and all its related nuances. Where should tax rates be set? Who should be responsible for how much? How should the government spend its tax revenues? These are questions that will always be highly contested, not just on the national stage but at the state and local level as well.

The topic of corporate taxes, and particularly the treatment of offshore profits, has been spending some time in the limelight as of late. We live in a globalized world, and as such many large multinational corporations have operations that extend beyond their domestic borders to the far corners of the world. Revenues, expenses and profits are generated within a variety of international domiciles, and the tax treatment of these flows can get a bit tricky.

Under the current system when a US multinational generates a profit in a foreign country those profits are subject to that foreign country’s corporate income tax code. Then, when the corporation “repatriates” those profits by converting them to US dollars and bringing them back to the US, an additional corporate income tax is then paid to the US government. Rather than being fully taxed twice, the corporation is credited with the amount of foreign tax that was already paid, making the amount paid to the US government equivalent to the difference between the US rate and the foreign rate.

In the case where the corporation doesn’t repatriate its profits in the same year they are earned, it still has to recognize a tax expense by booking a deferred liability that will come due and payable once those profits are eventually repatriated. For financial reporting purposes, though, the tax expense is being recognized on the corporation’s income statement in the current year. This reduces reported earnings, which is important for reasons we’ll talk about in a bit.

There is, alternatively, a way to completely avoid paying the US corporate income tax – perhaps permanently. The corporation can claim what’s called an “APB 23” exception by stating its intention to “indefinitely reinvest” those profits outside the US. If those profits are not headed back to the US anytime soon (or perhaps ever), the law stipulates that no tax should be due and payable to the US government.

For instance, consider a scenario in which Starbucks opens a coffee shop in Jakarta, Indonesia. If the store does well and turns a profit Starbucks might want to use the profits to fund the opening of another store in order to expand its footprint and build a long-term presence in the country. In such a case Starbucks essentially tells the US government that it intends to reinvest those profits in Indonesia for an indefinite period of time. Under this scenario no US tax is paid, and no deferred tax liability is booked on the corporation’s financials.

It’s easy to see that there is a clear incentive to claim this exemption and leave foreign earnings overseas. As mentioned previously, avoiding the tax expense boosts net earnings per share and therefore allows the corporation to command a larger share price by virtue of the fact that its earnings per share, the foundational number that many valuation metrics are based off of, are larger.

We are now uncovering the seeds of quite a bit of controversy and disagreement…US corporations currently have over $2 trillion in “reinvested earnings” in foreign jurisdictions. These dollars may at some point in the future be repatriated, but until they are the US has not, and will not, collect any tax on them. Much of this $2 trillion is “indefinitely reinvested” by US multinationals for legitimate business purposes. However, some amount of this money (and perhaps a large amount) is simply being kept offshore in order to avoid paying a hefty tax upon repatriation. These instances beg the question, “Is repatriation a patriotic duty?”

As always, there are multiples sides to the story. Liberal policy makers and media mouthpieces have been extremely vocal in recent years about his issue, characterizing American multinationals such as Apple, General Electric, Microsoft and Coca-Cola as gamesters utilizing offshore havens to cheat the system. Elizabeth Warren, in a scathing speech on tax reform, characterized the international tax treatment as “a giant wet kiss for the tax dodgers”. President Obama has proposed a policy of “deemed repatriation” in which all international profit would be subject to US tax regardless of whether or not it was ever actually repatriated back to the US (this is referred to as a “worldwide tax system”).

At the other end of the spectrum we find arguments in favor of a “repatriation tax holiday” in which corporations are allowed to bring untaxed earnings back to the US at some reduced (or eliminated) tax rate. (The last repatriation holiday was granted under the Jobs Creation Act in 2005.) Proponents of this line of thinking point to the fact that at 39.1% the US already has one of the highest corporate tax rates in the world, and that only 6 OECD countries currently implement the type of worldwide tax system that Obama has proposed (down from nearly 35 countries 100 years ago).


A third perspective might be that the current system works relatively well and there is no need for any sweeping reform. After all, if shareholders of US corporations ever want those foreign earnings to be distributed they will need to eventually repatriate them and pay the tax. Alternatively, if they are generated by an overseas subsidiary and intended for indefinite reinvestment in that foreign jurisdiction there is not a very strong argument for the US government tapping that subsidiary with a tax. Proponents of this argument would take the approach that “if it’s not broke, don’t fix it.”

Political messaging, especially during an election year, tends to oversimplify the issues in order to paint the other side as the undisputed villain. As it relates to repatriation, there are a number of nuanced layers that get lost in the generic soundbites currently being floated around in articles and political speeches. While we certainly don’t agree with the broad characterization of multinationals as tax dodgers, it is clear that many of these corporations are using the definition of “indefinite reinvestment” required for the ABP 23 exemption quite loosely. So, back to our original question of whether or not repatriation is a patriotic duty, our general sentiment would be that no, it isn’t. However, we would qualify that answer by saying that we feel corporations should honor the spirit of the ABP 23 exemption, and oh yeah…it sure would be nice to bring some of that $2.1 trillion back home to the US!

david_headshot_bw.jpgAuthor David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.

Subscribe to our Weekly Insight via email!


Transparency is one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward way about what we are doing in their portfolios and why. This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.