Fitch Ratings recently noted that revived tax proposal discussions are likely to result in US multinationals repatriating funds back to the US, and we may have our crumbling roads and bridges to thank.
The Wall Street Journal reported at the end of July that lawmakers were taking a more accommodating stance to each other’s political priorities, largely because government revenue from a one-time tax on repatriated funds could help fund the stalled highway bill, which was recently extended by five months to buy time.
Fitch said the proposal would likely result in reductions in foreign cash balances held by US multinationals.
“We believe the proposal lacks incentive for companies to keep cash overseas and could therefore result in a repatriation of funds back to the US. Such cash redeployment would likely go toward acquisitions and shareholder returns,” Fitch said.
The rating agency added that it would not expect material rating changes following such a repatriation since its ratings emphasize gross leverage metrics. In addition, most ratings of issuers that hold significant cash balances overseas include some expectation that the cash will be used for M&A or shareholder returns. Fitch noted that cash deployment in excess of expected levels in these areas could lead to rating actions.
The proposal aims to reduce the current and future build up of cash overseas while limiting the financial incentive for companies to relocate businesses overseas. A priority for Republicans is eliminating the US system of taxing companies on their worldwide income, following in the footsteps of most foreign tax jurisdictions. Many would also like to provide special treatment for intellectual property, such as patents, to discourage US companies from locating those properties to countries with lower rates.
To prevent companies from shifting earnings offshore where they wouldn’t be taxed or otherwise exploiting a new tax system, Democrats have suggested a combination of measures including a minimum tax – significantly lower than today’s 35 percent – on some portion of multinationals’ future foreign earnings.
Fitch noted that so far no specifics have emerged on what the one-time or ongoing rate might be, but earlier this year, the Obama administration proposed a one-time 14 percent tax on profits earned and held abroad, and a 19 percent rate suggested for future foreign earnings. Republicans are likely to counter with much lower rates in both categories.
Some issuers, Fitch said, have been able to reduce foreign cash balances through foreign investments or through tax planning mechanisms, such as moving intellectual property overseas and charging back the domestic parent. Those issuers may not have sufficient cash overseas to fund the proposed tax on existing undistributed foreign earnings. Fitch said tax credits may help, but this could lead to additional borrowers if cash generated from operations is already earmarked for other purposes, including capital expenditures, dividends or share repurchases.
“For investment grade and most high yield issuers, liquidity shouldn’t be an issue. However, given the size of incremental tax payments relative to foreign cash balances, changes could be negative for some credit profiles,” Fitch said.