Overseas Tax Holiday For Tech Giants May Come With A Catch

Even so, one worry is that the overseas tax holiday for tech firms may not turn out as the bonanza its made out to be. That depends on whether legislation puts conditions on how money could be spent and creates enforcement mechanisms.

Rather than see the money go toward company stock buybacks or acquisitions, Trump and Congress could steer money toward job creation and capital spending, says a UBS analyst.

If the (Trump administration) wants to really drive inward investments within the US there might have to be some sort of mandated use of cash, maybe to spend it on (capital expenditures). As yet, we do not know, UBS analyst Geoff Robinson said in a report.

Theres reason to think Robinson might be on the right track.

Theres trillions of dollars offshore. We want to get that back into America, Gary Cohn, Trumps chief economic advisor, said in a recent interview. We want the companies to bring the money back and put it back into the economy. We want them to create jobs.

Cash-rich tech companies like Apple,Microsoft (MSFT), Google-parent Alphabet (GOOGL) and Ciscocurrently would pay a 35% tax on so-called repatriated earnings. Rather than take the tax hit, theyve kept the money overseas.

President Trump has proposed a one-time tax of 10% on offshore earnings while the Republican-controlled House has proposed a lower 8.5% rate.

The overseas tax-break that Congress passed in 2004 was called the American Jobs Creation Act, but didnt do much to stimulate the economy, analysts say. The AJCA taxed repatriated earnings at a 5.25% rate.

The top five firms in bringing back cash in 2004 were drug companies Pfizer (PFE) and Merck (MRK), as well as Hewlett-Packard, Johnson amp; Johnson (JNJ) and IBM (IBM). According to the IRS, $312 billion was brought back in all.

However, only 10% of companies eligible to bring back cash in 2004 did so, says Richard Lane, an analyst at Moodys Investor Service. Many companies kept cash overseas because of AJCA requirements, he said.

The AJCA required companies to reinvest tax savings in worker hiring and training, infrastructure, research and development and capital projects. According to UBS, however, Funds in 2004s repatriation may have been earmarked for capital investment but ultimately were spent in large part on share repurchases.

UBS says that happened because the AJCA did not include a tracking mechanism so the government could audit companies and gauge compliance. The Trump administration could put better enforcement mechanisms in place.

Samp;P 500 companies have more than $2.6 trillion in overseas cash. Some of that may be needed to continue funding foreign operations.

The companies currently with the most overseas cash are Apple, Microsoft, Cisco, Google and Oracle (ORCL), Moodys says.

While Cisco has stated any cash brought back to the US could be used for reducing debt on its books, analysts have other ideas.

If a tax holiday is approved, BMO Capital Markets said in a report thatit expects Cisco and Hewlett Packard Enterprise (HPE) to focus more on acquisitions, while Apple and smaller companies would likely lean more toward capital return.

In the case of Apple and Cisco, some analysts envision enough cash being brought back to fund transformative deals. Apple has about $250 billion in cash, growing at about $50 billion a year. About 90% of Apples cash is overseas. A one-time, 10% repatriation tax would give Apple some $220 billion for acquisitions or buybacks, Citigroup analyst Jim Suva said in a report. Suva speculated that Apple could buy large companies such asNetflix (NFLX), Walt Disney (DIS) or Electronic Arts (EA).

Cisco, meanwhile, could bring back up to $56 billion in cash from overseas, analysts say. In a report, Credit Suisse speculates that enterprise software providers ServiceNow (NOW), Splunk (SPLK), or computer security firm Palo Alto Networks (PANW) could be on Ciscos shopping list. Pacific Crest Securities adds Red Hat (RHT) and Nutanix (NTNX) to the list of possible Cisco targets.

Intel (INTC) is among semiconductor companies with a cash hoard overseas. Intel could bring back about $12 billion, says BMO Capital Markets. Nvidia (NVDA) and Qualcomm (QCOM) also have significant overseas cash. But, BMO Capital does not expect a Trump tax holiday to spur an acquisition spree among chipmakers.