If you haven’t had a holiday since 2004, you’d be looking for some relief right about now. That’s what large U.S. companies that own foreign subsidiaries are thinking. They are excited about the proposed tax cuts gaining momentum in Congress that would include a lower corporate tax rate and a foreign profit repatriation tax holiday.
Right now companies that repatriate (bring back) foreign profits pay federal tax at a rate of 35%. This rate is so high that many American companies leave their profits overseas to avoid the steep tax. But the proposed repatriation holiday would change the picture by allowing these large companies to bring back their profits to the U.S. at a dramatically reduced tax rate. Proposals currently under consideration differ slightly, but a rate of 10% has been mentioned numerous times.
This would represent a vast potential windfall for companies that have cash overseas. The leading company that would benefit from the repatriation holiday is Apple (NASDAQ:AAPL), which finished the second quarter with $261.5 billion in cash, the vast majority of which (over $230 billion) is parked overseas.
If a 10% repatriation holiday were to be implemented, it could save Apple about $58 billion in taxes, which could be a huge boost for the stock. Not only would Apple pay a reduced tax bill, but it would then have around $200 billion of spendable cash that it could reinvest in its business, use to buy back shares, or pay a higher dividend to shareholders.
Apple is just one of the many companies likely to benefit from a repatriation tax holiday; many other leading tech companies would also do well. Here’s a list of companies with the largest overseas cash balances:
Apple $261 BN Microsoft $126 BN Alphabet $92 BN Cisco $68 BN
Johnson & Johnson $41 BN Amgen $38 BN Facebook $32 BN Amazon $26 BN
In 2004, the repatriation tax holiday passed under President Bush brought back $312Billion in overseas profits. Most of the money was used to give cash back to shareholders largely in the form of dividends or stock buybacks.
We know the best performing stocks after the 2004 repatriation holiday were the companies that brought the greatest amount of money back to the US. This is precisely why President Trump’s proposal is expected to favorably impact the stocks of those companies with the largest cash balances overseas.