The Strategic Use of Short‐Term Loans to Access Offshore Cash

• DOI: http://doi.org/10.1002/jcaf.22095
• Published date: 01 November 2015
• Date: 01 November 2015

23

© 2015 Wiley Periodicals, Inc.

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

DOI 10.1002/jcaf.22095

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The Strategic Use of Short-Term

Loans to Access Offshore Cash

Thomas D. Schultz and Roger Y. W. Tang

As established in

several previous

articles, Ameri-

can corporations have

accumulated signifi-

cant amounts of cash

offshore, resulting in

relatively high liquid-

ity balances (Cole,

2014; Le Guyader,

2011, 2012, 2014;

Marcum, Martin, &

Strickland, 2011).

U.S. corporations

have an incentive to

keep cash offshore

that is generated from

profitable operations

in relatively low‐tax,

foreign jurisdictions because

repatriations to the United

States can trigger significant

tax liabilities. In addition,

indefinitely postponing the

repatriation of foreign earn-

ings maximizes a corporation’s

after‐tax profits for financial

reporting purposes. However,

such reinvestments potentially

trap the related cash outside

the United States, where it is

not available to make dividend

payments, repurchase stock, or

invest in domestic operations.

In the management discussion

and analysis (MD&A) section

of Form 10‐K filings, many

U.S. corporations disclose

limitations on cash accessibil-

ity associated with repatriation

(Cole, 2014).

Given the magnitude of

cash held by foreign subsidiaries,

managers of U.S. multinational

corporations (MNCs) continue

to seek tax‐effective strategies

for utilizing offshore liquidity

balances. Le Guyader (2014)

addresses four principal actions

managers have taken in the

current environment, including

adding debt to the

balance sheet, rein-

vesting in foreign

operations, making

select repatriations,

and moving con-

solidated operations

out of the United

States. One addi-

tional strategy that

merits attention is

the use of short‐term

loans from subsid-

iaries operating as

controlled foreign

corporations (CFCs)

as permitted under

Internal Revenue

Code (IRC) §956.

This article examines how U.S.

corporations have successfully

structured short‐term loans

from their CFCs to access

offshore cash for domestic

purposes without generating

undesirable tax or financial

reporting consequences.

CONTROLLED FOREIGN

CORPORATIONS

The United States gener-

ally taxes the worldwide income

of domestic corporations and

allows a credit for foreign income

In times of uncertainty, maintaining a strong

cash position generally enhances a corporation’s

financial flexibility; however, holding significant

cash balances offshore to avoid tax consequences

associated with repatriations can make the

amounts unavailable for use in the United States. A

viable, tax-effective strategy for U.S. multinational

corporations seeking to access offshore cash is

to structure short-term, intercompany loans from

their subsidiaries operating as foreign controlled

corporations. By coordinating the treasury and

tax functions in this area, corporations can suc-

cessfully address the applicable IRS rules while

providing liquidity to support domestic operations.

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