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A $500bn game of chicken. That’s what it feels like as a handful of the biggest US technology companies posture over what they plan to do with their “trapped” overseas cash holdings. But like all games of chicken, the end must come eventually – and it’s hard to see that this is one the tech companies will win.
John Chambers, chief executive of Cisco Systems, struck the most provocative pose in an interview with the FT last week. After four fruitless years of arguing in Washington for a tax holiday for repatriating his foreign cash to be invested in the US, he says he’s had enough and is going to spend it somewhere else instead.
That’s a cool $39.4bn. No matter that Cisco’s existing spending hasn’t been enough to prevent that foreign cash pile from almost doubling in the past five years. Mr Chambers says he has his eyes set on acquisitions in Canada and Europe and that this time he means it – really.
The tech companies aren’t alone in having an embarrassment of foreign liquid assets. Something close to $1,000bn is generally estimated to be biding its time in foreign climes, often stashed away in tax havens from Bermuda to Lichtenstein (though in reality, much of the money finds its way back into low-yielding US dollar investments.) But the concentration of wealth among a small number of tech companies makes their tussle with Washington unusually conspicuous.
It seems that the time is getting closer for them to accept that the prospects for any tax concessions are vanishingly small. That’s not just because giveaways to some of the world’s richest corporations would be a political non-starter in the current economic and political climate. Nearly a decade ago, multinational companies were given just the sort of holiday they are asking for now, paying only a 5.25 per cent tax after they insisted the money brought back would be reinvested for the good of the US economy.
And the impact on jobs? Almost all of the money repatriated was spent on share buybacks and other ways to reward Wall Street. As Ed Kleinbard, a law professor at University of Southern California’s Gould School of Law, succinctly puts it: “Congress was had.” It is unlikely to let itself be suckered a second time.
Investors can be forgiven for starting to get antsy about all of this. The returns on all this cash are paltry: Apple reported interest and dividend income of less than $1.1bn in 2012, on liquid investments that totalled $121bn by the end of the year.
And it seems that, when it suits a management group’s own personal interests, the “trapped” overseas cash may not be so trapped after all. That drew an understandable complaint this week from Southeastern Asset Management, the largest outside shareholder in Dell, when it protested about how Dell was planning to repatriate up to $8.1bn to pay for its buyout. Hadn’t shareholders always been told in the past that the tax hit made it uneconomic for Dell to bring cash back to reward them directly?
One reason the backers of Dell’s buyout might feel more comfortable about the idea now is that, as a private company, the PC maker won’t have to worry about one cloud that hangs over those with public shareholders to appease: the hit to earnings that could come from repatriation.
Under US rules, companies don’t have to account for taxes on cash that they intend to invest offshore indefinitely. Once they start to bring that money back to the US, though, the assumptions that underpinned their earlier accounting will be subject to new scrutiny. Accounting for the tax now on profits accumulated in the past will dent earnings.
It should also raise questions in shareholders’ minds about whether past profits were unduly inflated by the underlying assumptions about foreign investments that were made at the time.
An end to this game of chicken may be coming into sight. It never pays to predict when Congress will act, but a head of steam has been building up for broad tax reform in the US, potentially bringing down the headline rate from its current 35 per cent while closing loopholes that have left corporations accounting for less than 10 per cent of US tax receipts.
With reform in the offing, those piles of cash sitting idly overseas look vulnerable. In the argument over the gives and takes required to reach any new tax deal, they will be a soft target for politicians looking for easy revenue-raising measures, says Mr Kleinbard.
Tech companies may feel that they can come out of such a negotiation ahead. But it is a risk that hardly seems worth taking and one that should add to the impetus to reduce the cash mountains sooner rather than later.
Richard Waters is the Financial Times’ West Coast managing editor
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