Untaxed Foreign Earnings—Keep Growing!

• Author: Jack T. Ciesielski,Thomas R. Weirich
• DOI: http://doi.org/10.1002/jcaf.22210
• Published date: 01 January 2017
• Date: 01 January 2017

71

© 2017 Wiley Periodicals, Inc.

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

DOI 10.1002/jcaf.22210

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Untaxed Foreign Earnings—Keep

Growing!

Jack T. Ciesielski and Thomas R. Weirich

Untaxed for-

eign earnings

(UFEs) are

full of paradoxes. A

single untaxed dollar

is worth more to net

income than one-

and-a-half times a

dollar that is taxed.

Assume the U.S. tax

rate is 35% and if an

entity has $1 of after

taxed earnings, that

dollar is worth $1.54

in untaxed earnings

($1 ÷ .65). They can be a tre-

mendous source of earnings

power for a company, yet for all

of their importance to earnings

and their continued growth,

there is scarcely a mention of

them in the financial state-

ments. They can account for all

of the earnings of a firm when

such earnings are attributable

to foreign earnings only, but

you can only discover them

if you read between the lines

of the footnotes. A financial

statement reader might turn to

an entity’s Management’s Dis-

cussion and Analysis section,

with its focus on presenting a

firm’s performance, resources,

and liquidity “through the eyes

of management,” for informa-

tion related to untaxed foreign

earnings; however, it is no more

helpful than the basic financial

statement package.

Despite the lack of robust

disclosures, some informa-

tion is available from 10-Ks.

In 2015, the total amount of

cumulative untaxed, undistrib-

uted foreign earnings at 312

S&P 500 firms reached $2.246

trillion—about the same size

as India’s gross domestic prod-

uct (GDP). The total dollar

amount of untaxed earnings

created in 2015 equaled that

of 2014, but it mattered more

in 2015 because total earnings

declined. Although

some businesses may

plan to reinvest in

foreign countries,

the main objective

of this article is to

highlight the lack

of transparency in

companies’ filings

related to UFE. Fur-

thermore, this article

does not focus on

the fact that foreign

earnings are taxed

in the country where they are

earned but focuses on the lack

of transparency in financial

reporting of UFE.

GOING GLOBAL

“Indefinitely reinvested

earnings,” or UFEs, have

not garnered the same kind

of attention in the financial

media as in the past. Exhibit

1 shows the dollar amount of

the balances of untaxed foreign

earnings for the past 11 years

(emphasis on balances). The

main dollar disclosure required

by accounting standards is the

cumulative amount of untaxed

foreign earnings. The dollar

Focusing on a lack of transparency related to

untaxed foreign earnings (UFEs), this article high-

lights the growing balance in accumulated UFEs

by the corporate sector. The authors also explain

where the concept of “indefinite reinvestment

assumption” comes from that has resulted in

UFEs. The article further discusses that these UFEs

are not really part of an entity’s real earnings that

are available to shareholders by discussing Schro-

dinger’s paradox. © 2017 Wiley Periodicals, Inc.

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