Deemed Repatriation?
Once again, not to be mistaken for Tuesday's With Morrie, it's Tuesdays With Trump...
Corp tax rate declines from 35% to 20%. Foreign liabilities and assets are an issue, viz. taxes, foreign cash balances, profits, assets. In the case of liabilities read the word deferred.
Is is estimated that 3 - 4 Trillion is sitting offshore in that tax purgatory or limbo, mostly in eurodollar deposits and instruments at foreign branches of US banks. Since one can borrow money cheaper, why would one repatriate it and take the 35% tax hit?
But wait, repatriated assets will be taxed at 8% for profits invested in real estate and other hard assets, and 15.5% for profits in cash and stock and other liquid assets. Not only did tax rates suddenly drop, but repatriation is offered on a one time basis at 8-16%.
Apple with $250B in cash currently held overseas in limbo would pay $40B and have $210B to play with domestically. As always, the Devil is in the details...
For decades, American companies have attributed the majority of the value of their products to patents and other intellectual property such as trademarks. Apple assigns a portion of the IP, proportional to overseas sales, to subsidiaries in those countries with low tax rates and assesses substantial patent royalties on those sales.
The new tax bill has a minimum tax on income from patents held overseas, and also reduces the tax on patent income within the USA, both at the same rate of 13%. Of what benefit is continuing to hold those patents overseas?
Ultimately, those offshore royalties flow back to those low tax locations, like Ireland, in a double Dutch sandwich. The tax is payable in Ireland at 12.5%, but the Irish company pays a royalty to a Dutch subsidiary, for which it gets an Irish tax deduction.
Thus rendering a much lower real tax rate and in fact in most situations with a territorial tax system, rather than global one, a ZERO tax rate. How? Transfer pricing.
Apple Canada pays out royalties to the Irish subsidiary for use of the patent, and sets the royalties to equal the size of the company’s Canadian profits. Result: zero tax rate, and all the profits are relocated to Ireland.
The new tax code does not have a provision which allows for tax free repatriation of a controlled foreign corporation’s intangibles. Without providing any method for reassignment or transferring those patents back to the US without paying the 13% tax, what incentive is there? Little to none, so what is going to change?
Some money may flow back, with the hope that the after tax capital will be put to real economic use, in new factories, industries and jobs. Unfortunately, not gonna happen as that capital will be perverted and diverted.
Rather than real economic development which would benefit the many, that capital will be misallocated to financial engineering viz. buybacks, stock price propping, higher dividends and executive bonus or pay, to benefit the few.
Pouring salt in the wound, "repatriation" from a tax perspective, X-currency base erosion, and the anti abuse tax (BEAT) are forcing banks to fund in three month CD and CP markets and fund less via FX swaps.
Formerly off shored surplus USD stashed in $300B of term UST held by corps, will be sold, higher bond float, lower price, higher yield, more dollars, lower dollar. Since those profits originally bought UST, they are already in USD, what repatriation? DOH!!
Translated into English, as opposed to common belief based in false doctrine, the tax cuts on "repatriated" dollars will drive dollar and bond prices lower, while pushing cost of loan funds higher.
And indeed all of the above has occurred. Next contestant please. But first this word from our sponsors, please stay tuned to Your Screwed no matter what you do. More to come in Rubio's Ignorant Regrets? Stay tuned, no flippin.
Recommended Reading
Transfer Pricing
Deemed Repatriation
International Tax System Rewritten
Corp tax rate declines from 35% to 20%. Foreign liabilities and assets are an issue, viz. taxes, foreign cash balances, profits, assets. In the case of liabilities read the word deferred.
Is is estimated that 3 - 4 Trillion is sitting offshore in that tax purgatory or limbo, mostly in eurodollar deposits and instruments at foreign branches of US banks. Since one can borrow money cheaper, why would one repatriate it and take the 35% tax hit?
But wait, repatriated assets will be taxed at 8% for profits invested in real estate and other hard assets, and 15.5% for profits in cash and stock and other liquid assets. Not only did tax rates suddenly drop, but repatriation is offered on a one time basis at 8-16%.
Apple with $250B in cash currently held overseas in limbo would pay $40B and have $210B to play with domestically. As always, the Devil is in the details...
For decades, American companies have attributed the majority of the value of their products to patents and other intellectual property such as trademarks. Apple assigns a portion of the IP, proportional to overseas sales, to subsidiaries in those countries with low tax rates and assesses substantial patent royalties on those sales.
The new tax bill has a minimum tax on income from patents held overseas, and also reduces the tax on patent income within the USA, both at the same rate of 13%. Of what benefit is continuing to hold those patents overseas?
Ultimately, those offshore royalties flow back to those low tax locations, like Ireland, in a double Dutch sandwich. The tax is payable in Ireland at 12.5%, but the Irish company pays a royalty to a Dutch subsidiary, for which it gets an Irish tax deduction.
Thus rendering a much lower real tax rate and in fact in most situations with a territorial tax system, rather than global one, a ZERO tax rate. How? Transfer pricing.
Apple Canada pays out royalties to the Irish subsidiary for use of the patent, and sets the royalties to equal the size of the company’s Canadian profits. Result: zero tax rate, and all the profits are relocated to Ireland.
The new tax code does not have a provision which allows for tax free repatriation of a controlled foreign corporation’s intangibles. Without providing any method for reassignment or transferring those patents back to the US without paying the 13% tax, what incentive is there? Little to none, so what is going to change?
Some money may flow back, with the hope that the after tax capital will be put to real economic use, in new factories, industries and jobs. Unfortunately, not gonna happen as that capital will be perverted and diverted.
Rather than real economic development which would benefit the many, that capital will be misallocated to financial engineering viz. buybacks, stock price propping, higher dividends and executive bonus or pay, to benefit the few.
Pouring salt in the wound, "repatriation" from a tax perspective, X-currency base erosion, and the anti abuse tax (BEAT) are forcing banks to fund in three month CD and CP markets and fund less via FX swaps.
Formerly off shored surplus USD stashed in $300B of term UST held by corps, will be sold, higher bond float, lower price, higher yield, more dollars, lower dollar. Since those profits originally bought UST, they are already in USD, what repatriation? DOH!!
Translated into English, as opposed to common belief based in false doctrine, the tax cuts on "repatriated" dollars will drive dollar and bond prices lower, while pushing cost of loan funds higher.
And indeed all of the above has occurred. Next contestant please. But first this word from our sponsors, please stay tuned to Your Screwed no matter what you do. More to come in Rubio's Ignorant Regrets? Stay tuned, no flippin.
Recommended Reading
Transfer Pricing
Deemed Repatriation
International Tax System Rewritten
Comments
You should have been a scientist!
2 things are happening. The US is bankrupt and the Petro-Yuan is driving up the price of oil.
If foreigners trigger a flight away from the US $, there will be hyperinflation in terms of US $ s.