February 28, 2011
Investors have been hearing for some time now about the hordes of cash being stashed on U.S. corporate balance sheets. In a recent column, The Wall Street Journal’s Jason Zweig explains a big part of why the cash stockpiles are so high — and why that cash might not be benefiting investors anytime soon.
“U.S. companies are taxed at up to 35% when they bring home the earnings generated through the operations of their overseas subsidiaries,” Zweig writes. “They get a credit for any taxes paid to foreign governments — but, since the corporate-tax rate in the U.S. is one of the world’s highest, most companies are in no rush to bring the money back onshore. By keeping those earnings abroad, U.S. companies can indefinitely defer their day of reckoning with the IRS. That can put firms in the peculiar position of having tons of cash offshore that they might need but can’t use at home without taking a tax hit.”
Zweig says the U.S. is the only major country that employs such taxation tactics. And, he says, one study has found that companies’ efforts to avoid the repatriation tax often end up making companies less efficient. Companies are continuing to build up cash outside of the U.S., while at the same time borrowing large sums within the U.S., since interest rates are so low. “Investors should remember that a big chunk of cash on the balance sheet may look tempting but isn’t necessarily there for the taking,” Zweig says.
I think that they offshore tax havens need to be examined more throughly. Money will always go where it is treated best and these corporations are no exception. Now what would be nice is if they decided to invest their capital at home by making some sort of deal with the government that helps to create manufacturing. Or uses the money to restructure this useless educational system that is ruing future generations here in the US and Canada. If there is more tax free giving to benefit business it will be reaped 10 times over by the government. However if the government taxes the company’s who bring their money back and it goes into the governments giant coffers to be speant frivilously then it is not good. I would keep it offshore too rather than have the government gain control of the capital and destroy its potential.