New Strategies for “Trapped” Excess Cash

• Published date: 01 November 2014
• DOI: http://doi.org/10.1002/jcaf.22000
• Author: Louis P. Le Guyader
• Date: 01 November 2014

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© 2014 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22000

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Louis P. Le Guyader

New Strategies for “Trapped”

Excess Cash

American corpora-

tions continue to

accumulate cash

offshore, with liquidity

balances now setting

new record highs. This

article follows up on

several previous articles

examining this “excess

cash” phenomenon. It

is an update on corpo-

rate strategies and tac-

tics that have emerged

since the cash buildups

were first noted about

five years ago.

Two things have not

changed. The American

corporate tax code remains

unchanged, with the effect that

earnings are now taxed in the

United States at one of the high-

est rates in the world. In this tax

environment, the rational man-

ager would prefer to book earn-

ings in the lowest tax jurisdiction

possible, presumably warehous-

ing greater amounts of cash

that might have been eventually

returned to shareholders as divi-

dends (and stock repurchases)

or used for other purposes. That

logical loop—maximize after-tax

earnings to maximize cash divi-

dends and stock repurchases—

continues to be thwarted by a

second aspect of American tax

policy: when foreign earnings

are repatriated for any purpose,

the American corporation must

pay a U.S. “repatriation tax”

equal to the difference between

the American corporate tax rate

and the tax rate of the foreign

jurisdiction where the earnings

accrued and the excess cash is

held. A rational response by the

earnings-maximizing manager

has been to postpone repatria-

tion, but from the sharehold-

ers’ point of view, that cash is

trapped offshore. This postpone-

ment in repatriation has intro-

duced the need to develop new

strategies and tactics, which I

examine in this article.

A third item has

not changed: Ameri-

can corporations

have continued to

earn record profits

offshore. With no

change in the tax

environment, cash

and liquidity bal-

ances have remained

large and grown.

One matter is

sure: This setting

demonstrates that,

in theory, taxes are

inefficient. However,

every tax avoidance strategy

introduces, or substitutes, new

inefficiencies. Every manage-

ment action to thwart the repa-

triation tax inefficiency has, so

far, monetized those inefficien-

cies in the form of new costs

eventually passed on to share-

holders. The art of managerial

excellence is to find the substi-

tute for repatriation that opti-

mizes value for shareholders.

A CHANGE IN THE SETTING—

UNITED STATES’ FUNDING

“SECRET”

The setting is also accompa-

nied by a tax funding “secret”—

a major change in the past year

U.S. companies continue accumulating cash off-

shore, with liquidity balances now setting new

record highs. This trend is about half a decade old.

But the U.S. corporate tax code has not changed,

with the effect that earnings are now taxed in the

United States at one of the highest rates in the

world. And companies bringing earnings home will

still be hit by the U.S. foreign “repatriation tax.”

From the shareholders’ point of view, this means

the cash is “trapped” offshore. New strategies and

tactics are needed. What are they?

© 2014 Wiley Periodicals, Inc.