Repatriation Games

In April 2017, President Trump unveiled his proposal for deep reductions in individual and corporate tax rates through a number of initiatives, including reducing the individual tax brackets, lowering the highest marginal rate for individuals, eliminating some personal tax categories, and reducing taxes for corporations. One of the ways that the President proposes to reduce the tax burden for multinational corporations is through a one-time tax “holiday” on the repatriation of foreign earnings. This would allow companies to repatriate foreign earnings back to the U.S. at a one-time flat tax rate of 10%, much lower than the top corporate tax rate of 35%. Proposed changes in a plan supported by Paul Ryan, Speaker of the house, would levy an 8.75% tax on cash and cash equivalents and 3.5% on other profits, spread over an eight-year period. After that, dividends paid by foreign subsidiaries would be 100% exempted.


Boost to Corporate Spending

The amount of money repatriated could be substantial, with the Congress’s Joint Committee on Taxation estimating that U.S. multinationals had as much as $2.5 trillion (as of 2015) offshore to avoid taxation. S&P 500® companies earn almost 50% of their revenues abroad. This benefit should encourage an increase in corporate spending and investment domestically with the earnings that return. Funds could also be used to pay tariffs or taxes on goods that are produced overseas and imported into the U.S. to sell to U.S. consumers.

Robust Response to Previous Repatriation

This is not the first time that a repatriation event has occurred. In 2005, Congress implemented the Homeland Investment Act, where companies were allowed to repatriate back foreign earnings at a one-time flat rate of 5.25%. An estimated $300 billion was repatriated, or more than half of foreign earnings by U.S. multinationals. The intent was for funds to be used for specific investments in the U.S.

Questionable Results Ensued

Although the amount of funds repatriated was significant, opinions vary on whether they were used as intended. Some believe that the majority of the funds ended up with shareholders, either in dividends payouts or share buyback programs. In fact, a study by the National Bureau of Economic Research concluded that the repatriations “did not lead to an increase in domestic investment, employment or research & development, even for the firms that lobbied for the tax holiday stating these intentions.” However, others counter with the hypothesis that putting more money into the hands of the end consumer boosts consumer confidence and spending. PNC shares theses opinion & we believe repatriation does have a positive impact.

Benefits to Company Performance

One strategy for investors seeking to benefit from repatriation was to pick those companies likely to repatriate the most dollars in absolute terms. However, in 2005, the top 25 companies in that category did not outperform. Outperformance occurred for those companies repatriating the largest absolute amount relative to their market cap, with the top 25 in the category realizing returns almost four times that of the overall S&P. For those companies, repatriation had a greater impact than for those where repatriated earnings represent only a small portion of their overall size. This may be due to different weightings between the overall S&P 500 weightings and the weightings of the more concentrated portfolios. We believe the majority of the outperformance is attributable to the impact of the tax repatriation holiday.

Potential to Benefit from Future Tax Repatriation Holiday

There is considerable uncertainty surrounding when and what tax reform initiatives will be enacted. As a result, in our view, the market has not yet priced in the definitive enactment of a tax repatriation holiday, making this a potentially attractive investment theme. Based on the results of the 2005 repatriation, Strategas Partners created baskets of stocks that are most likely to benefit from a tax repatriation holiday. We have developed a separately managed account holding 25 stocks with the highest relative amount of cash relative to market cap. Technology represents the highest weighting of the Strategas Repatriation Index, not surprisingly, as technology companies have the largest percentage of unrepatriated foreign earnings as a part of market cap, at over 18%. We will be monitoring the news, as well as the Index and SMA closely.

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Important Legal Disclosures and Information

The material presented in this article is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. For more information, please contact PNC at 1-888-762-6226.


The material presented in this article is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. For more information, please contact PNC at 1-888-762-6226.

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